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It was borne out of the Bretton Woods agreement in 1944, which set forth that foreign currencies would be fixed against the dollar, which was valued at $35 per ounce of gold. After 1971, when the dollar was no longer convertible to gold and the domestic market was stronger, the Bretton Woods agreement was abandoned, and the currency conversion process became more variable. Though the major players in the European market were deeply involved in and veterans of international trade by the time other markets joined in, there were more currencies to keep track of - the franc, the pound, the lira, and many more - than was reasonable.
Instead of dozens of currencies, the main countries trade in five - US dollars, Atralian dollars, British pounds sterling, the Euro, and the Japanese Yen. Today, the Foreign Exchange Market is international and worldwide. How can you compare the value of a stock across international lines if the values are expressed in two separate, non-equivalent currencies? And how do you measure gains and losses when conversion rate is constantly changing.
When you begin trading on Forex, you have to learn how to convert currencies and note the difference in values, as well as how currencies are exchanged between international lines. With so many variables and volatile currencies being exchanged, how can you know a good buy or sell when you see one without complete awareness of the value of foreign currency. Of course, this will not be consistent down to the cent or fraction of a particular currency throughout an entire biness day, but at least you will have your starting point from which to begin, almost like North on a compass. It is sort of like making reference to miles per gallon or rotations per minute on a car - a direct comparison of one to the other in the form of a ratio.
The smallest fraction, or decimal, in which a currency can be traded, is called a pip and this is ually the degree to which a cross-rate is expressed. Since the whole number value (or big figure, as it is referred to) of the secondary currency, or the currency in the YYY position in terms of conversion changes so infrequently, often only the decimal portion of the number is mentioned in the Foreign Exchange Market. Experiencing a change in the big figure - the whole number ahead of the decimal - unless it was only becae the number was already within a few thoandths, would represent much too large a shift in value for a single trading period and would be a rare occurrence that could cae the entire market to make a drastic swing in one direction or the other.
However, with the consolidation of most of the European market trading on Forex to the Euro, many currencies have been eliminated, making trade on Forex for other lands less complicated. We will discs this process, as well as other ways to take advantage of the Foreign Exchange Market (like arbitrage) in more depth in future chapters. Once you are able to discern a base value of each particular currency and its conversion rate against others traded on Forex, you will be able to more closely monitor the change in currency conversion, including its inconsistency and volatility.
Following charts, listening to the advice of market analysts and chartists, and learning to make educated predictions yourself will help you keep track of vario marketing trends. Simply learning to read market trends can remove a lot of natural apprehension and uncertainty for beginning traders.
Volatility, or the tendency for fluctuation that can affect your earnings within the stock market, is typical within a domestic market but even more evident and much stronger on the Foreign Exchange Market. As mentioned earlier chapter, devaluation refers to the purposeful decline in value of a currency in relation to other currencies as charged by a government entity.
An opposite change in value can also occur, raising the value of the foreign currency. There are ways in which you can take advantage of devaluation and revaluation, which will be discsed later on. This is considered to be depreciation as well.
Currency appreciation and depreciation are changes in the value of the currency that are driven by market forces rather than by government mandate. In a single day, following the announcement, the Rsian ruble was depreciated by an amazing 25%. In running to the bank, people actually caed the crash rather than escaped it.
On the flip side of the coin, too fast of an appreciation sets up a country for inflation, or an increase in the retail value of products sold to the public based on currency valuation. Often, men enjoy taking old cars and restoring them to their original beauty. The ever changing rates of currency conversion and volatility of the market create an inherent market risk, or a day to day potential to experience loss due to fluctuation in securities prices.
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