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Forex Markets


Every country uses currency, and most countries have established their own currency. When transactions occur between people or businesses, even governments in different countries, there is an exchange rate that comes into play. When someone travels to another country, or either imports or exports products between countries, the payment is usually exchanged between different currencies. These exchange rates are used to value one currency verses another, and these rates are changing all the time. Traders who speculate on the changes in these currency rates are called Forex traders, they trade the Forex Markets.

In the Forex markets, traders buy one currency and sell another for the purpose of profiting on the movement of exchange rates. If a trader buys a currency from a broker, and that currency increases in value, the trader can sell that currency back to the broker in the future, and keep the profit. There is risk in trading, as the currency may decline in value, in which case the trader loses a portion of their capital.

forex marketsThere is no one central Forex Market. Banks and brokers have set up networks, where exchange rates are listed. These banks and brokers allow their customers to monitor the exchange rates, and to trade the currencies. New York, London, Tokyo, Sydney are major trading centers, and these are the major Forex capitals too.

Originally you had to be in one of those places to trade money, or at least have a telephone connection with a broker who was there. It was very difficult for somebody who was not on the spot to act fast enough to react to the sudden fluctuations in price that can happen in the Forex markets.

Brokers allow traders to trade large amounts of currency even larger than the trader deposits as security. A trader opens an account with a broker, and places risk capital into their trading account. The broker will provide a loan to the trader, using the initial capital as security. The trader then trades the total amount that is loaned to the trader, and pays the broker interest on usage of the loan. This mechanism of borrowing a large amount by depositing a smaller amount of risk capital, is called “trading with leverage”.

The concept of leverage is what provides the opportunity for a high return, but also high risk. A small movement in a large currency position can create a large profit (or loss), especially when compared to the capital provided by the trader. Because of the risk involved, traders are cautioned to control the amount of leverage that they employ. Discipline as well as knowledge and experience are necessary to succeed in the forex markets.

Additional Resources;

Tools and information for forex traders

Forex Markets: Overview

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