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An overview of the Forex market
The Forex market is a non-stop cash market where currencies
of nations are traded, typically via brokers. Foreign currencies
are constantly and simultaneously bought and sold across local
and global markets and traders' investments increase or decrease
in value based upon currency movements. Foreign exchange market
conditions can change at any time in response to real-time events.
The main enticements of currency dealing to private investors
and attractions for short-term Forex trading are:
24-hour trading, 5 days a week with non-stop access to global
Forex dealers.
An enormous liquid market making it easy to trade most currencies.
Volatile markets offering profit opportunities.
Standard instruments for controlling risk exposure.
The ability to profit in rising or falling markets.
Leveraged trading with low margin requirements.
Many options for zero commission trading.
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Forex trading
The investor's goal in Forex trading is to profit from foreign currency
movements. Forex trading or currency trading is always done in currency
pairs. For example, the exchange rate of EUR/USD on Aug 26th, 2003
was 1.0857. This number is also referred to as a "Forex rate"
or just "rate" for short. If the investor had bought 1000
euros on that date, he would have paid 1085.70 U.S. dollars. One
year later, the Forex rate was 1.2083, which means that the value
of the euro (the numerator of the EUR/USD ratio) increased in relation
to the U.S. dollar. The investor could now sell the 1000 euros in
order to receive 1208.30 dollars. Therefore, the investor would
have USD 122.60 more than what he had started one year earlier.
However, to know if the investor made a good investment, one needs
to compare this investment option to alternative investments. At
the very minimum, the return on investment (ROI) should be compared
to the return on a "risk-free" investment. One example
of a risk-free investment is long-term U.S. government bonds since
there is practically no chance for a default, i.e. the U.S. government
going bankrupt or being unable or unwilling to pay its debt obligation.
When trading currencies, trade only when you expect the currency
you are buying to increase in value relative to the currency you
are selling. If the currency you are buying does increase in value,
you must sell back the other currency in order to lock in a profit.
An open trade (also called an open position) is a trade in which
a trader has bought or sold a particular currency pair and has not
yet sold or bought back the equivalent amount to close the position.
However, it is estimated that anywhere from 70%-90% of the FX market
is speculative. In other words, the person or institution that bought
or sold the currency has no plan to actually take delivery of the
currency in the end; rather, they were solely speculating on the
movement of that particular currency.
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