Foreign Exchange Markets

The Forex market is a place for individuals, businesses, financial institutions, the public sector and nations to make a profit off the varying currency prices. This is done through judging which currencies rise and fall against other currencies. These currencies are traded in pairs. This generally means that every currency will pair against every other currency and have a price. For example if you are trading between sterling pounds and US dollars and both currencies fall 10%, you are in the same spot as you were before. You wouldn't make a loss if you used either currency to buy the other because their ratio will be similar.

The Forex Market however is not as complicated as the stock market. Although, a greater deal of knowledge is required as you don't study companies, but rather you study nations. The Forex Market is an over-the-counter market. This means it a global market with no centralized trading area.

Since the Forex market is not widely publicized, not much information is readily available. Thus, not many people will fully understand it. As well as that, since the profit margins are extremely small, many people will not think entering the FX market is worth the risk.

FX-Dollar turns lower on caution before U.S. data

LONDON, Jan 4 (Reuters) - The dollar dipped on Monday, reversing earlier gains as caution set in ahead of key U.S. data, leaving investors wary of pushing the U.S. currency up further after it hit a four-month high versus the yen.

Optimism about the prospects for a U.S. recovery have supported the dollar recently but analysts said more evidence of a strengthening economy was needed to justify further gains.

Investors were jittery in a busy week for U.S. data that will culminate in monthly jobs data on Friday.

This week's releases begin with the Institute for Supply Management's December manufacturing index, due at 1500 GMT, which is expected to show a reading of 54.3 versus 53.6 in November. ECONUS

A euro zone purchasing managers' survey which confirmed the region's manufacturing sector expanded at its fastest rate in 21 months [ID:nLDE6030JH] also boosted the euro against the dollar, while better-than-forecast UK data lifted sterling.

"People are coming back after the new year, but the market has been slow to settle back in and there's a reluctance to chase dollar strength in a week which includes U.S. payrolls data," said Daragh Maher, deputy head of forex strategy at Calyon.

How to Value Currency Pairs ?

Typically, in the FX market, currencies are traded in pairs. For example, Euro/US Dollar or US Dollar/Japanese Yen. Whenever you trade currencies online, you are then, buying one currency and selling another. Currency pairs are abbreviated. The above pairs would be EUR/USD and USD/JPY.

The currency on the left is called the base currency, and the one on the right is the cross currency.

The value of a currency pair is determined by the strength or weakness of the base currency in relation to the cross currency. The base currency value is always 1. That means when you see a quote of 1.4652 for the EUR/USD, its value means 1 Euro will buy 1.4652 dollars. The next day you may see a quote for the EUR/USD of 1.4725. If you listen to the financial news you will hear them say something along the lines of, "the Euro gained strength against the USD today", or "the Dollar fell today against the Euro". In pocketbook english, that simply means it takes more dollars today to buy 1 Euro than yesterday.