An Introduction to the Forex Market
The foreign exchange or “forex” market is where the various currencies of the world are traded. A forex transaction is the result of one party purchasing some quantity of one currency in exchange for a quantity of another currency. The forex market evolved in the 1970s when countries began to switch from fixed to floating exchange rates. With an average daily trading volume of over $3.2 trillion, the forex market is one of the largest and most liquid financial markets in the world today. Profits are made from the difference in value between the two currencies (the exchange rate).
The Importance of Currency Exchange
For most of us, currencies are an integral part of our daily lives. Currencies need to be exchanged in order to conduct foreign trade and business. For example, if a person is living in the United States and wants to buy a product from France, a currency conversion from dollars to euros (EUR) must occur in order to facilitate the purchase. When you consider the volume of global trade that takes place on a daily basis, you can understand why the forex market is so large.
Making Profits from Forex Trading
Investors and speculators trade currencies in an effort to benefit from fluctuations in the currency exchange markets. For example, an American investor who believes that the Japanese yen will appreciate in value (against other currencies), may decide to take a long position (purchase) Japanese yen to try to profit from that increase.
What Makes the Forex Market Unique
The appeal of currency trading to investors and speculators include:
• The size and volatility of the market
• The level of liquidity
• The continuous activity of the market (24 hours a day)
• The opportunity to trade without brokerage fees
The Risks of Forex Trading
The size and volatility of the forex market make it unlike any other market in the financial world. While forex trading does offer an opportunity for significant profits, there is also the possibility for extreme losses. Before getting involved in forex trading, an investor should become very familiar with forex practices and strategies and never invest money they cannot afford to lose.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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