Exchange Rates Tutorial for The Beginner Trader
Posted in Forex Basics for Beginners on 26. Mar, 2010
The fluctuations that happen in a currency market is what causes you to make profits or even lose money. It may seem like common sense, but it is not as easy as you think it is.
Why did the forex market exist? Once you understand why there exists such a thing as the exchange rate, you will be able to capitalize on what you learn and make profits from the forex market.
Here is a quick tutorial that teaches you how exchange rates work. The most basic meaning of an exchange rate is how one currency is priced at in correlation to another currency. If 1 USD is the quivalent to CAD 1.20, that means that the exchange rate for the currency pair CADUSD is 1:1.2 or simplified by 1.2
How come a currency can be worth more than the other one? Whois the one that decides this exchange rate?
Back then before the forex market was the way it is now, the USD was pegged by a gold standard. It means that the price of USD 1 was based on how much it costs to buy a 1 oz o gold. And all the other currencies were pegged to the USD and fluctuated either up or down within a 1 percent range.
Although there is some minor fluctuations, it was called a fixed exchange rate. Now that the gold standard has not been used, the fixed exchange rate was not used. The forex currently just operates mainly on the fluctuations of exchange rates.
How does exchange rates fluctuate? They are controlled by supply and demand of the market. When the demand for a currency is higher than the supply, the exchange rate for that currency will increase. It’s just basic economics fused within forex.
On the other hand, if the supply is higher than the demands of the market for the currency, the exchange rate of the currency will drop.
The USD has weakened over the years because the federal reserve keep printing more and more money. This basically increases supply more than demand.
This is the basics of forex and by capitalizing on how the market fluctuates, you are trading them for profit.
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