Forex Trading And The U.S. Dollar

in Currency

The Forex is an informal marketplace where investors from around the world come to exchange one currency for another. In truth, the investor is buying one currency while simultaneously selling another. Dozens of currencies are exchanged and all at varying rates that fluctuate constantly. There is the potential for unlimited profits for investors that can accurately predict which way the rates will fluctuate for a given period of time. Before an investor can realize any gains, they must first decide which currency pairs to invest their money.

To begin with, an investor does not necessarily lose money when the exchange rates are falling. Just as with equities, investors can profit on the Forex whether prices go up or down-so long as they predict correctly. In fact, the greater the fluctuation (regardless of direction), the greater the potential for profit. Now the Forex market as a whole is considered to be very volatile and very fluid meaning that prices fluctuate substantially but investors can buy and sell positions easily.

While the Forex market as a whole may be both volatile and liquid, this does not mean that all currency pairs are equal. Some currency pairs, for instance, are traded in such low volumes and are so consistent in their exchange rates that they are both unprofitable and hard to liquidate should problems arise.

The U.S. dollar backs or finances almost 90% of all transactions on the Forex. The daily volume alone creates the large moves investors like to see because they can capitalize and make large profits if they play the game correctly. Plus, the liquidity of the U.S. dollar allows investors to unload positions easily when they become unprofitable. For these reasons, investors are advised to stick with only currencies that trade with the dollar when investing in the Forex.

There are dozens of currencies that are exchanged with dollars but not all are as profitable as others. There are actually 7 other currencies that trade with the U.S. which account for the bulk of the transactions on the Forex and they include:

1. Euro (EUR)
2. British Pound (GBP)
3. Swiss Franc (CHF)
4. Canadian Dollar (CAN)
5. Australian Dollar (AUD)
6. New Zealand Dollar (NZD)
7. Japanese Yen (JPY)

The best currency pair will include the USD and the currency that produces the greatest price movement with least volatility. To determine this currency pair, an investor will need to use analysis (fundamental or technical) to identify the best opportunities along with entry and exit points. However, because of its volume and liquidity, it is best for investors to find currency pairs that include the USD as they have the greatest potential for profit and it is easy to enter and exit positions at will.

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Forex Trading And The U.S. Dollar

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This article was published on 2010/09/27