How Foreign Exchange Pirces Work

For the people who are new to the forex market, its hard to imagine giving a price for a currency in another currency. However, its much easier to understand currency value as what we can exchange it for. Let us have a very simple example, as you know 1 British Pound is enough to buy a bottle of Coca cola. How can traders know that 1 pound is equal 1.5 US Dollars, 10 Chinese Yuan or 1.2 Euro?

The answer is the economy!!!

In most of case, the value of a currency is trying to represent the performance of the economy in this country.

When the UK economy is performing well, the British Pounds is likely to rise in value against other currencies. Therefore, everyone would like to hold the British Pounds as it is growing up and investing in Pounds is pretty much like investing in every firm, government and person in UK. It makes sense that when the UK economy is strong, so too is the Pounds. Thus, the value of Pounds rises against other weaker economies. In another way, the value of currency may keep the same value if there are two countries are growing at the same speed.

The investors can read the news to predict the trend and speculate on the currency through a currency broker, if the news is better than the people expecting, the currency value will grow up and investor make profit.

Let's have a simple example, if the exchange rate of British Pounds and US Dollars is 1: 1.5, and we can exchange our Pounds (100 pounds) to US Dollars through a broker. We can get 150 Dollars. A few days later, the US annual GDP result is better than analyst expectation, the exchange rate may become to 1: 1.4, then we exchange our 150 Dollars back to Pounds, we now can get 107 Pounds and make 7 Pounds profit.

This is the very simple core of the foreign exchange market. When traders speak of buying and selling currencies, they're really just talking about swapping one currency for another to make a profit. Of course, the full story is slightly more complicated, but keep reading and we'll share all the nitty-gritty details.

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