The word Forex in the term Forex Trading is a acronym for for exchange. Forex trading is about making a profit on currencies from various countries. Most countries in the world have currency which is known as free floating. This means that the value of the currency does not have a fixed value. It fluctuates. These value of these currencies fluctuate in value against other currencies. The fact that most currencies fluctuate in value is how Forex traders make money. If a person purchased 1,000 Euros it would have cost them around $1200 US Dollars. Over time, the Euro vs US Dollar value increased. At the end of the year, the 1000 Euros was worth $1300, making the purchaser a $100 profit. |
The value of currencies can be affected for a few different reasons. Political news, economic new, and geographic events can all increase or decrease the value of currencies. Unemployment rates and national disasters are two examples of things that can change the value of currency. This is where the risk in Forex trading comes in. No one can predict that a national disaster will occur, causing that country's currency value to plummet.
Forex is not all about the absolute value of a country's currency. It is about the value of once currency vs another. Forex trading is about demand. If investors, companies, or governments are buying a currency because they need it for transactions or investments, the value of that currency will rise. If they do not want a currency and are selling what they do own, the value of that currency will go down.
There are a few things that give Forex trading some unique advantages. One is the 24 hour market. Because the Forex market is worldwide, trading is continuous. The market opens in Australia on Sunday evening and ends after the markets close in New York on Friday.
Forex trading has a high amount of liquidation. Liquidation is the ability an asset can be converted into cash quickly without price discount. With Forex trading, large amounts of money can be moved in and out of foreign currency with a low price to move it.
Forex offers low transaction cost. Typically the cost for the transaction is built into the price. This is called the spread. The spread is the difference between the buying and selling price.
The Forex market has no restrictions for trading. This means that if a person thinks that a currency pair will go up in value, they can buy it. If a person feels that the value will go down, they can sell it.
Leverage is something that get buyers interested. Leverage is the ability to trade more money on the market than what is is the traders account. If you were to trade at 60:1 leverage, you could trade $60 for every dollar that is in your account. You can trade $60,000 using only $1000 capital.
For many traders, Forex trading can be extremely profitable. However, with any type of market trading, it does has its risks as well.
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