Forex Patterns and Probabilities: Trading Strategies for Trending and Range-Bound Markets

CHAPTER 2

All About Forex

If you’ve ever traveled outside of your home country, there’s a good chance that you’ve already performed a currency transaction. In most cases, travelers must exchange their “home” currency for the currency of the country they are visiting. Please note that there are two currencies involved in this transaction, but only one exchange rate.

For example, when a traveler from the United States crosses the border into Canada, he or she now must exchange U.S. dollars for Canadian dollars. This traveler is essentially selling the U.S. dollar and buying the Canadian dollar.

THE CANADIAN DOLLAR AND THE U.S. DOLLAR

In 2002, our traveler would have received about C$1.60 in Canadian currency for every U.S. dollar. We could say that the exchange rate at that time for the U.S. dollar/Canadian dollar was about 1.60 Canadian dollars per U.S. dollar. If we wanted to be precise, we could add several decimal spaces, and express the exchange rate as 1.6000.

In the years that followed, the exchange rate changed dramatically, and by 2006 it had fallen to 1.10. This meant that a traveler from the United States to Canada in 2006 would only receive about C$1.10 in Canadian currency for every U.S. dollar exchanged.

If we wanted to measure very small changes in this exchange rate, it could be expressed as 1.1000. We can safely say that the U.S. dollar depreciated significantly against the Canadian dollar during the early part of the twenty-first century (see Figure 2.1).