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What Does Forex Mean


What Does Forex Mean

 

 

Foreign currency exchange, or Forex, is the largest financial market in the world. It is sometimes also referred to as the FX market. Traders speculate on the values of currencies, and they profit from accurate predictions in exchange rates. The Forex market has many characteristics that differentiate it from the trading process of other markets. But ultimately, the Forex market is a volatile, auction-based system not unlike the stock market and other financial markets. Risks remain high.

The market in which currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world.

There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.

An over-the-counter market where buyers and sellers conduct foreign exchange transactions. The Forex market is useful because it helps enable trade and transactions between countries, and it also allows an investment opportunity for risk seeking investors who don't mind engaging in speculation. Individuals who trade in the Forex market typically look carefully at a country's economic and political situation, as these factors can influence the direction of its currency. One of the unique aspects of the Forex market is that the volume of trading is so high, partially because the units exchanged are so small.

Size

Each day, more investment capital flows through the Forex market than through any other financial market. It is estimated that the Forex market is 35 times larger than the New York Stock Exchange, the largest stock market in the world. If the investment capital in every stock market in the world were added together, it would represent only one-tenth the value of the Forex market.
This makes Forex a highly liquid environment ideal for quick trading. Because there are so many participants, a trader can confidently expect even the largest orders to buy or sell currency to have instantaneous execution.

Currency Pairs

The units of trade in the Forex market are "currency pairs." Traders speculate on the value of one currency against another. No currency has its own intrinsic value without this correlation. The Japanese yen, for example, might rise in value against the euro while simultaneously falling in value against the U.S. dollar. Currency pairs are quoted using three letters for each currency, and the two currencies are listed together to form one six-letter code. "EURUSD" is the currency pair that reflects the exchange rate between the euro and U.S. dollar.
    
Leverage

The fluctuations in currency exchange rates are relatively small each day. To profit from quick trades in the Forex market, extraordinary leverage is used to control large assets on small capital. If you buy into a currency pair with $1,500 and the exchange rate is 1.50, then you purchase 1,000 units. If the exchange rates rises to 1.51, you have made $10 from a fluctuation of one cent.
However, in the United States, Forex brokers provide 100:1 leverage. Your $1,500 lets you purchase $150,000 dollars worth of currency, and one-cent fluctuation gives you a profit of $1,000. This is a 67 percent gain on the account from a change of one cent in the exchange rate. But if the exchange rate lost one cent or more, the Forex investment would quickly lose nearly all its value.
    
Account Types

Because of the extraordinary risks of high leverage in Forex trading, different account types are provided to satisfy different risk tolerances among traders. The distinguishing characteristic of these accounts is the "lot" size. A lot is the smallest size trade an account provides.

Traditional Forex accounts trade in lots of 100,000 units. This is very risky and not recommended for new traders. "Mini" Forex accounts reduce the minimum trade size to 10,000 units. However, this is still substantially risky. "Micro" Forex accounts trade in sizes of 1,000 units and can be opened for a deposit of as little as $25.
    
24-Hour Market

Unlike most financial markets, the Forex market takes no breaks between Sunday evening and Friday evening. It is one long market session, in which traders from around the world buy and sell currencies. This makes ideal for automated trading, in which computers are programmed to trade based on specific algorithms. This allows traders to capitalize on Forex movements overnight while they sleep. Additionally, those who want to learn how to trade but work another job can dip into the Forex waters on their own time in the evenings.