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Global Forex trading works by using information intense models regarding the historical, current, and possible future of the economy based on the strengths of a particular sector or national economy. Individual brokers, global forex trading firms, and banking or financial institutions use the information gathered regarding the economy to make trading decisions. Much of the information comes from financial and government institutions in the same manner that stock trade information comes from the companies the stock is representing. In this manner, the agents and brokers use the information gathered from multiple sources to formulate a global forex trading decision based on the prices quoted by the dealers.
The dealers quote prices based on the predicted and current value per unit of the foreign currency. For example, a quoted price would look like “dollars per unit of yen” if it is between U.S. dollars and the Japanese yen. These dealers are constantly ready to purchase and sell foreign currency through global forex trading. This works almost in the same manner as a standard stock trade. The dealer quotes a bid price they are willing to purchase foreign currency at, and quote a sell price based on their asking quote. So, it would be common to see XX US Dollars bid per unit of yen sold. At this point, the agencies such as the individual trader, financial brokers, and banking institutions make decisions for which currency dealer they will purchase from or sell to based on these bidding quotes.
Global forex trading becomes more interesting when the value of global trading is concerned. The value of the trade is not dictated by the dealer's quoted price, but instead it is determined by the order flow. In this manner, strong and weak currencies are developed based on the difference of the value between the purchase price and the sold price. This customer order flow is used to convey information, where a positive or negative order flow indicates the value of global forex trading.
|Jennifer Mathes, Ph.D.|