Concept #1 Exchange Rates

As you saw from the example in the previous post on Forex Trading, the exchange rate can be defined as the the price of one currency in relation to another.

A fixed exchange rate, like the one established in 1944 by the Bretton Woods Accord, is an official rate set by monetary authorities (and sometimes governments).

Fixed rates are typically set to a pre-determined value (e.g. the price of an ounce of gold), and allowed only slight fluctuation.

A floating exchange rate is what is in effect on the foreign exchange market today. This type of rate is not set to any outside reference point.

Rather, the rate is determined by the market forces of supply and demand.

Although our previous example used just two currencies, the Dollar and the Euro, it is important to note that you must NOT view Forex trades as a simple one-to-one transaction - not if you want to make any real money, that is. Forex trading is not as easy as buying $10,000 worth of U.S. Dollars with $5, 000 worth of Euros after a market correction.

This doesn’t mean you can’t achieve these kinds gains, but you must understand that the majority of successful trades on the retail level involve a well-planned strategy based around buying and selling multiple currencies at a time - not just one or two.

This brings us to our next concept which we will talk about in the next Forex Trading post: Currency Pairs