Forex is the short for foreign exchange (for ex). Foreign exchange means foreign currency. That is if the dollar is the currency for you, for an Indian or a Frenchman the dollar would a foreign currency for him, while the French Franc or the Euro would be his currency.
The interplay between the currencies is known as forex markets trade. Every country deals with another, buying and selling goods and services. And this is paid for in the currency agreed upon. For instance if France were to trade with America, and is selling goods to America, it might prefer the Euro or the Dollar, depending upon the strength of the euro or the dollar. The strength is how many euros would you get for a dollar, or how many dollars you would get for a euro?
Where can you find that currency? You can find it in another country, say China or Japan which have trade surpluses with US, thereby meaning that they have excess dollars which they would wish to put to use to earn even more. it's a cycle that never ends.
So China and Japan play their stock of dollars in the currencies market, and earn handsomely, again in dollars over a period of time. This is done by Governments, financial institutions and banks, who are authorised to deal in foreign currency trades. The volume of trades in currencies is in excess of trillions of dollars, a whopping amount. Thus even the third decimal digit in quotes carry a high weightage in calculating income from the trade.
Every day the currency values fluctuate. If it exceeds an 'x' percentile or goes below that percentile, it is said to appreciate or depreciate respectively. This is a highly skilled game, in which a minor error can lead to a loss of nearly million dollars!
The currencies are denominated by short forms: The US Dollar is USD, the Japanese Yen is JPY, the British Sterling Pound is GBP, the Indian Rupee is INR and the Euro is EUR and so on. Trading takes place between various currencies simultaneously. This is known as arbitrage.
Arbitrage is a technique where you a buy a product at a lower price at a different location, and sell it at a higher price elsewhere. The difference between the two markets is the arbitrage you earn. Apply it to the currencies being traded in, and you would have it right.
The currencies that are traded heavily are the US Dollar, the Sterling Pound, the Japanese Yen, and the Euro, because they represent more than 40 per cent of world's trade.
If you are trading, then unless you are authorised, you have to use a broker, who for a fee would park your funds in a currency, and based on your instructions, and his advice, you can take advantage of the arbitrage. Mind you, you can also lose quite heavily.
Currency traders or what are known as treasury desks in the financial institutions and banks operate throughout day and night, because while part of the world sleeps, the other is awake and there is money to be made. Earlier, this was not so, since telecommunications density was not so high, and one had to wait for the daylight to understand what happened the previous day. Today, however, with banks of computers, internet connectivity, telecommunications ruling the roost, it has made the world a sleepless one at least for those who are into trading generally, what to speak of currency traders!
There are a number of books that explain the intricacies of foreign exchange trades. The best would be of course the study books that grad students in finance use, because they are based on sound academic study. As for the ..made easy books, this author has no comment.
