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Starting Forex Trading…the basics

Byadmin

Mar 9, 2009 , ,

The term “Forex” is short for Foreign Exchange. Each country in the world generally has its own money or currency. Some countries may share the same currency e.g. the Euro is shared by a number of countries in Europe such as Germany, France and Spain. These currencies have to be valued against each other via some mechanism so when goods or services are bought across borders, proper pricing can be done. This valuation is essentially the Exchange rate between currencies. Exchange rates of currency can vary from day to day. They depend on a wide variety of factors such as Interest rates, Geopolitical climate and many others. Forex trading is a platform through which currencies are bought and sold according to their current rates in order to make profit.

The way it works is simple: A Forex trader purchases some amount of a particular currency which they think will rise in value against the currency they are exchanging it with. After a certain period of time, assuming that the rate rises as expected, they sell or re-exchange the previously-bought currency, making a profit. The same thing can be done with selling. So, Forex Trading is based on speculation. The trader does some analysis of market conditions and, based on that, makes an informed “guess” what direction the Exchange rate will go. The difference between Currency Trading and traditional gambling is simply that, with Forex Trading, proper analysis gives you a lot more information so you are able to better determine market direction. If it feels like throwing dice, you are doing it wrong.

Providing a small example of Forex trading will probably help you to have a clearer idea of how this whole system works. Let’s suppose that the Exchange Rate between the Euro and the Dollar is 1.2614 i.e. 1.2614 Dollars buys 1 Euro. Suppose then that, after your preliminary analysis, you conclude that the Euro is going to rise against Dollar. This basically means that, in a certain amount of time, you will need more dollars to buy the same amount of Euros than at the current rate. Please note that estimating this should be another major result of your analysis. It could be a few minutes, or it could be a few months. In this case we’ll assume it will be days. So, you buy €10 at the rate mentioned above spending $12.614 in total.

After a few days, you find that the Euro has indeed risen up in value and that €1 is now equivalent to US$1.30780. You immediately exchange the €10 for $13.078 and earn a profit of $0.464. This amount may look very small, but imagine if you had invested $10,000 instead of $10, your profit would have been a substantial $464. This example neglects the charges and differences that exist between buy and sell prices. It’s just to illustrate the point. Now imagine this sort of transaction on a grand scale. I mean trillions of dollars traded every day, and you start to understand what the Forex Market is.

Forex trading started in 1970s. It was during this time that most world governments switched over to floating exchange rates for their currencies from fixed rates. Previously these governments would peg the exchange rate of a their currency against another one, such as the US Dollar. Many economists promoted floating exchange rates as a far healthier option for the economy of any country, as it ensured a relatively less deterioration of rates due to any kind of shock or the influence of a foreign business cycle.

At present, the forex market is one of the largest markets in the world with a turn-over of more than $3.2 trillion. There are millions of banks, governments, individual forex traders, corporations and other entities trading currencies around the clock. Because the Forex Market is international, someone somewhere is always trading currencies on the market.

There is always a demand for Forex trading. With the rising trend of globalization, people need foreign currencies now more than ever. The revolution in transportation and communication industry has made it possible for people and companies of different countries do business with each other. Taking this into consideration, we find that the Forex Markets offer ample opportunities for people who are willing to learn about forex trading to profit from, provided they arm themselves with the appropriate information first.

By admin

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