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Forex Currency Exchange - Reviewed.


As you've already learned, forex is simply a huge currency exchange where people buy and sell various currencies. This is now done entirely over a vast array of computer and electronic networks. Unlike, say the New York Stock Exchange, there is no actual physical location where traders gather to conduct these currency trades. Everything happens electronically through what is referred to as an "interbank market".

forex interbank marketThis advanced technology has allowed individuals who previously wouldn't be able to - to trade forex easily and quickly from anywhere in the world. It's now possible to trade forex from your Blackberry while you're out fishing or walking your dog.

Forex currency exchange involves buying a certain currency in the belief that it will increase in value against another specific currency. This means that when you trade forex, you are buying a specific currency "pair", rather than just one stand-alone currency. There are 7 "pivotal" currencies in forex trading: the US dollar, the Japanese Yen, the Euro, the British pound, the Candian dollar, the Australian dollar, and the Swiss Franc.

The most important foreign exchange activity is the spot business between the dollar and the four major currencies (British Pound, Euro, Swiss Franc, and Japanese Yen). These 4 currencies and the US dollar make up the majority of currency lots traded in the forex market.

The primary factors influencing exchange rates include trade balances, the state of the economy, implications drawn from chart analysis, as well as political and psychological factors. Many factors influence the movement of a currency - you will eventually learn what type of events influence a currency to move in a certain direction.

Ebb and flow of capital between nations, otherwise known as Purchasing Power Parity (PPP) is the central factor that determines forex market momentum. In addition, fundamental economic forces such as inflation, interest rates, GDP, and unemployment are constantly influencing currency prices. Faith in a government's ability to stand behind its currency will also impact currency price.


 

Forex trading - Forex and the gift of leverage.

When an investor decides to invest in the forex market, he or she must first open up a margin account with a broker. Usually, the amount of leverage provided is either 50:1, 100:1 or 200:1 - depending on the broker and the size of the position the investor is trading. Standard trading is done on 100,000 units of currency, so for a trade of this size, the leverage provided is usually 50:1 or 100:1. Leverage of 200:1 is usually used for positions of $50,000 or less.

It's important to note that what most people would consider a small fluctuation in a currency can actually result in a very large profit (or loss) as forex brokers allow you to use leverage in your forex account, meaning you can usually purchase $100,000 of a currency with only $1000 in your account. This allows you to make profits based on a much larger sum of money than you actually have. Of course, you can never lose more than the actual amount of money you have available in your forex account.

Leverage of this size is significantly larger than the 2:1 leverage commonly provided on equities and the 15:1 leverage provided by the futures market. Although 100:1 leverage may seem extremely risky, the risk is significantly less when you consider that currency prices usually change by less than 1% during intraday trading. If currencies fluctuated as much as equities, brokers would not be able to provide as much leverage. global forex currency markets

Although the ability to earn significant profits by using leverage is substantial, leverage can also work against investors. For example, if the currency underlying one of your trades moves in the opposite direction of what you believed would happen, leverage will greatly amplify the potential losses. To avoid such a catastrophe, forex traders usually implement a strict trading style that includes the use of stop and limit orders.

Most Forex brokers agree that the most important rule for making money in forex is to establish a system or program and then stick with it. The best way to make a profit in forex is to take your profit at a pre-determined level, and the best way to limit losses is with a "stop-loss" also determined when the order is placed.

One way that people lose money in forex is by not taking profit at the point when they previously said they would. This is like a gambler who's afraid to leave the table because he's on a roll, so he stays too long and eventually gives back what he had won. Sometimes even though a trader has made money on a currency, they hold on too long in the belief that it will go even higher - and then if it falls they lose the profits they could have taken.

Another way to lose in forex is by not getting out when your currency is falling - often times a trader will realize that he's lost a certain amount of money, but thinks if he holds on to it a bit longer, it will bounce back - this is why it's important to keep emotion out of your forex trading and limit your losses with stop loss orders.

The good news is that once you develop a reliable system for trading forex, and if you stick to it - there is a huge amount of money to be made in forex currency trading. A relatively small price movement of 120 pips in a currency can translate to a quick profit of $1200 in a very short time. It's reasons like this that forex is being discovered by more and more people who are using it to supplement their income by trading forex part-time from home.

  

 

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