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About the Forex Market – The Basics
The foreign exchange, or forex, market is relatively young. In the early 1970s after the United States dropped the gold standard, national currencies started to fluctuate widely. During the preceeding 30 years, most nations had agreed to keep their currency values stable in relation to the U.S. dollar, making a forex market unnecessary. Since the Gold Standard no longer existed, banks quickly realized that a profit could be made in “buying” currency when it was devalued and “selling” it after it strengthened, just like any other commodity. Today, the forex market handles about $1.9 trillion in transactions daily, and it runs 24 hours a day, five days a week. (It's always daytime somewhere.) The most traded currencies are the U.S. dollar, the Euro, Japanese yen, British pound, Swiss franc and Australian dollar. The forex market is dominated by international banks, government banks, investment banks, corporations, and hedge funds. In fact, individual traders account for only about 2 percent of the market. However, many people do try their hand at it, with varying degrees of success. In the forex market, transactions are always handled in pairs: You buy one currency and sell another one. The idea is to make a trade when you believe the currency you’re buying is going to go up in value compared to the one you’re selling. Then, if your prediction is correct, you do another trade in the reverse direction -- selling the currency you originally bought and buying the one you sold -- in order to reap the profits. For example, let’s say the market reports this: GBP/EUR 1.2200. That means the cost of buying one British pound is 1.22 euros. If you believe the euro is going to become more valuable than the pound, you might sell 100,000 pounds, buy 100,000 euros, and wait. Then let’s say a few weeks later, the exchange rate fluctuates : EUR/GBP 1.3100. Sure enough, the euro is now worth 1.31 pounds, a profit of 0.09 per unit. The forex market is huge and daunting, mostly inhabited by giant organizations. But it can be navigated by individuals who have studied the finer points and who can take the risk on something potential profitable. As the whole world uses money, the trading of that commodity is always going to be a major force in the financial world. |
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