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Do You Understand These Critical Aspects of FOREX

Aug 17, 2007
FOREX, also known as the FX market or the foreign exchange market, is largest and oldest financial market in the world. It is also the biggest and most liquid market in the world, a market that runs 24/5, circling the globe with financial transactions.

There has been some sort of foreign exchange for as long as people have needed to exchange currencies to do business. Technically, if you are a tourist travelling in a foreign country and you use a traveler`s check to pay for a transaction, you are engaging in foreign exchange. However, traders are not interested in that type of foreign exchange. They are concerned with trading foreign exchange, which occurs when one currency is traded for another on the market purely to make a profit.

In the past, foreign exchange trading was limited to banks, major currency dealers and occasionally to very large speculators. Only these groups were able to take advantage of the currency market`s fantastic liquidity and the strong trending nature of many of the world`s primary currency exchange rates. However, recent technological advancements and the development of various online trading platforms have made it possible for small traders to take advantage of the many benefits of FOREX trading.

Foreign exchange market brokers are now able to break down the larger sized inter-bank units and offer individual traders the opportunity to buy or sell any number of these smaller units. These brokers give any size trader, including individual speculators or smaller companies, the option to trade at the same rates and price movements as the big players who once dominated the market.

Transactions on the FOREX market are performed continuously by dealers at major banks or at FOREX brokerage companies around the world. FOREX is a part of a worldwide market, and it is active 24 hours a day. Dealers at major institutions work 24/5 in three different shifts. Traders may place orders with brokers for overnight execution, without waiting for the opening of any market.

Because of this continuous activity, price movements on the FOREX market are very smooth, without the gaps that occur on the stock market. The daily turnover on the FOREX market is somewhere around $1.2 trillion, so there is never any danger of an investor being unable to enter and exit positions whenever they want to. The fact is that the FOREX market never stops. Even on September 11, 2001, you could still get your hands on two-side quotes on currencies.

These currencies are on a floating exchange rate, and they are always traded in pairs such as Euro/Dollar, or Dollar/Yen. About 85% of all daily transactions involve trading of the major currencies. Four major currency pairs are usually used for investment purposes. They are: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar against Swiss franc. They appear on the market in this form: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. As a note, you should know that no dividends are paid on currencies.

If you feel one of the currencies in the pair you are trading in is undervalued, you can buy more of that currency (by selling the other). If everything goes as you expect, you later sell back the currency you bought (buying the currency you sold in the beginning) for a profit. Trading on FOREX utilizes margin in such a way that an individual trader is able to profit well from trades such as these. The market is one where high profits are accessible to all types of traders, and the market is also big enough to ensure that there will almost always be a good trading opportunity.

When you compare them, you will see that the currency futures market is only one per cent as big as FOREX. In addition, currency trading is not centered on an exchange, unlike the futures and stock markets. Trading moves from major banking centers of the U.S. to Australia and New Zealand, to the Far East, to Europe and finally back to the U.S. it is truly a full circle trading game.

As you can see, the foreign exchange market has come a long way. Being successful at it can be intimidating and difficult when you are new to the game. However, once you understand the market, you will be able to realize your potential to be a highly profitable trader.
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