Foreign Exchange Rates

Foreign exchange rates are the ratio between two different currencies and are used to calculate the relative value between them. Everyone has come into contact with foreign exchange rates at some point in their lives. If it was changing money for a family vacation, buying something online from abroad or actually trading forex for profit. Big banks, governments and corporations use foreign exchange rates the most to do business. Governments keep currency reserves to preserve the value of their own currency trough central banks and corporations and banks either trade for profit or to hedge against currency risks. Foreign exchange rates are determined on what is known as the Interbank market, which is not an actual physical market, but rather a make-shift fictive market that comes into play every time someone wants to change one currency for another. Foreign exchange rates tell us how much of one currency we will need to buy one unit of another currency. So, if the exchange rate between USD/EUR (Dollar and Euro) is 1.3 then that means you will need 1.3 Dollars in order to buy 1 Euro. The foreign exchange market is subject to the same laws of demand and supply as all other markets.

Foreign exchange rates are delivered by large data centers and then sent out to banks, traders and brokers. As a forex trader you will usually receive your price data from either the platforms data feed or from the broker themselves. A forex broker is the link between the Interbank market and the individual traders. Before the internet really took of, there was no real way for private individuals to trade forex. You would have to have a currency account with a bank and have them trade for you. Today there are more than 100 brokers online who can connect you to the internet and you can trade from the comfort of your own home.

Foreign exchange rates are also the actual price of a currency as no currency can have a price by itself, it must always be measured against something else. You make money in forex trading by selling one currency to buy another and hoping that the one you bought appreciates in value. That way you will be able to buy back more of the first currency and make a profit. The thing that makes forex trading so unique is the ability to leverage your investments. Leverage means gearing your trades with money that you ‘borrow’ in the market. The interest paid is called Margin and must be met. With a normal forex account you can leverage your trades by more than 100 times the money you actually have in your account. This means that if you deposit $3000, then you can actually trade for $300,000. It’s not difficult to see how this can be explosive. You can make a lot of money from leveraging your trades in forex, but you must also be careful not to exceed your margin limits. It’s always good to start out with a smaller amount first and then work your way up.

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