Forex is an acronym for Foreign Exchange. The foreign exchange market is an international over-the-counter interbank market for the buying and trading of different currencies. This market includes all financial aspects of purchasing, selling and trading currencies in current or predicted values. Forex is a complex market due to the large number of players in the market, the fact that it occurs twenty four hours a day and seven days a week. There are also many different types of Forex including Forex speculation, Forex arbitrage, Forex market making and Forex spot market making
There are three basic elements in the Forex market mechanism. These are the pairs of currency i.e. the dollar/ Euro, the U.S. Dollar and the British Pound, the one and the other currency being traded for another currency, the one for another. These are called Forex pairs.
The foreign exchange traders are the entities who make money from the buying and selling of the currencies. They are also called speculators. The currency speculators make their money by taking advantage of changes in the value of the foreign currencies and then buying and selling these currencies in further anticipation of changes in the value of the other. They use the difference they earn between the bid price and the asking price as their profit.
In the forex market, when two currencies are paired, if you believe that the exchange rate will move in the same direction (in the same direction as your investment in the other currency pair), then you can buy the other currency pair at its ask price. Similarly, if you believe that the exchange rate will move against your investment in the other currency pair, then you can sell the other currency pair at its ask price. In forex, a fundamental announcement of any country can cause a currency pair to appreciate or depreciate. And a fundamental change in the interest rates of the country or a general move in its gross domestic product can also affect the demand for that particular currency pair.
In short, it is the movements of interest rates and other economic variables that play a major role in determining whether a currency would go short or go long. If you look at the history of the price movements in the foreign exchange market, you would see that there have been some major currency pairs that went either long (dollar invested in Japanese yen) or short (US dollar invested in British pound sterling). But when this happened, you can be sure that the major economic factors had already determined how the market would proceed.
It may be a bit difficult for you to understand all these statistics when you just hear about them for the first time. But if you get some experience by trading in the Forex market before you start dealing with actual money, then you will definitely understand the basics of foreign currency exchange. So if you are thinking of going short the EUR/USD, GBP/USD/JPY, it is probably a good idea to learn more about the historical exchange data first.