Forex Information - The Mysterious Workings Of The Exchange Rate And The Impact On Forex (Part 1)

Exchange rates. Euros, dollars, yen, marks, francs; Floating exchange rates, pips, points – the whole concept of the exchange rate can be a daunting one for a beginning trader. But understanding how exchange rates work and how they affect forex markets is essential if you’re going to last longer than the time it takes to make one /really/ bad trade. Get ready, get yourself your favorite soothing beverage, and let’s dive in to the mysterious workings of the exchange rate. By the time you’re done with your drink, you’ll have a better understanding of the way the exchange rate works and how it affects the money you make in your trading.

What the heck is an exchange rate?

The exchange rate refers to the relative worth of one type of currency against another. To make it very simple for you, let’s use an exchange rate with which you are already familiar – the exchange rate of dollars to dimes. Suppose you have 10 one dollar bills. You know that each of those dollar bills is worth 10 dimes. You could, if you wanted, go to the bank – or the corner store – and ask to exchange your 10 dollar bills for 100 dimes. The exchange rate would be expressed as DOL/DIM=.10 or DIM/DOL=10. In other words, you can exchange one dollar for 10 dimes or 10 dimes for one dollar.

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