Finance Vocabulary: Beginner Forex

May 10, 2012 - PRLog -- What is currency trading?

The FX, or forex, refers to the foreign exchange market. This market changes quickly, is full of surprises, and is an exciting and dynamic market to participate in. Until relatively recently, only very wealthy private individuals, hedge funds, corporations, central banks, and large financial foundations had had the means to participate in the foreign exchange market when it came to currency trading. However, the proliferation of Internet technology and communications has leveled the playing field. Today just about any investor with the requisite interest and skill can sell and buy currencies straight from their computers by making use of online brokerage accounts.

The changes in currency are typically quite minute on a day to day basis. The majority of currency pairs will increase or decrease by under a cent on a given day, which typically is less than one hundredth of a variation in how much the currency is worth. As a result, when it comes to financial markets, the foreign exchange is very stable and not very volatile in comparison to most other similar markets. This is why there are a lot of currency speculators who take advantage of large leverage so they can make potential changes and movements more valuable to them.

When it comes to leverage, values can exceed 250:1 in the retail foreign exchange market. It is important to keep in mind that it can be very risky to use higher leverage. However, since there is a large amount of liquidity and trading occurs at all hours of the day and night, brokers well versed in the foreign exchange market are often able to take advantage of high leverage so any currency movements can have meaning for traders of currency.

The particularly deep liquidity present in the foreign exchange market as well as the ready use of high leverage have contributed to make the market grow quickly. These factors have also combined to help make the market an optimal location for a number of currency traders. It is possible to open or close a position in a matter of minutes. Alternatively, positions can be retained for weeks or months.

The prices of currencies are also difficult to manipulate since they are largely based on more objective factors such as supply and demand. Similarly, the market is so big that even central and international banks and other huge players in the market do not have the financial traction to manipulate the market easily by changing prices at their whims. As a result, there are a number of investment opportunities present in the forex market. However, for a currency trader to achieve success in the market, he or she must have a fundamental understanding of the factors that influence the movements of currency.


What exactly is forex trading?

The foreign exchange market, or forex, is the site of actual currency trading. The majority of people living on the planet depend on currencies in one way or another, whether they directly make use of currencies or not, as the trade and exchange of currencies is necessary for foreign matters such as business and trade to successfully occur.

For example, if you live in the United States and are interested in purchasing wine from Spain, you will either need to purchase the wine from Spain in euros or pay a company that you purchase wine from to do so on your behalf. As a result, the company that imports the wine from Spain into the U.S. will need to find the correct amount of U.S. dollars and exchange them into the correct amount of euros.

This equivalent exchange is also necessary when one is traveling. If you are visiting Egypt in order to see the pyramids, you can't simply pay in dollars since those aren't going to be accepted by default in Egypt. You would need to exchange your dollars for whatever currency was used in the region, which here would be the Egyptian pound. You would also need to make the exchange at the current value for both currencies.

Currencies, therefore, need to be exchanged all over the world, which is precisely why the foreign exchange market is so large. In fact, there is no other financial market that is larger or more liquid than the forex market. All other markets are far smaller in comparison, including the U.S. stock market. In fact, on average, the equivalent of $2 trillion U.S. dollars are traded each day in the forex. However, none of this trading occurs in a single centralized marketplace.

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