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The single most important thing with respect to FOREX market is the exchange rate between two currencies a currency pair. In general, the currency exchange rate reflects the health of an economy in comparison to others. You decide to buy 1 euros against US dollars. If you take a look at the FOREX quotes on your trading platform you will see that there are two prices for each currency pair. One is the price at which you can buy, referred to as the "ask price", and the other is the price at which you can sell, referred to as the "bid price".
The difference between these two prices is known as the spread. The ask price is always higher than the bid price. If your FOREX broker offers you a leverage of you can trade with a times more money than you have in your deposit. With this kind of leverage you can take a position that is a times larger in value and expect a times bigger profits or losses, therefore great care is advisable when placing your trade. Equities, on the other hand, are traded without leverage.
Then pick a currency pair e. Now you are already a trader in a market used by millions of people all around the globe. Check out your current profit or loss in the Open positions window. You can keep this position for as long as you like. When you no longer wish to keep your position, just close your trade by pressing the X button in the Open Positions window.
The Forex Market Explained
This is called long position. Second, since trades don't take place on a traditional exchange, you won't find the same fees or commissions that you would on another market.
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Next, there's no cutoff as to when you can and cannot trade. Because the market is open 24 hours a day, you can trade at any time of day. Finally, because it's such a liquid market, you can get in and out whenever you want and you can buy as much currency as you can afford. Spot for most currencies is two business days; the major exception is the U. Other pairs settle in two business days.
During periods that have multiple holidays, such as Easter or Christmas, spot transactions can take as long as six days to settle. The price is established on the trade date, but money is exchanged on the value date. The U. The most common crosses are the euro versus the pound and yen. The spot market can be very volatile. Movement in the short term is dominated by technical trading, which focuses on direction and speed of movement.
People who focus on technicals are often referred to as chartists. Long-term currency moves are driven by fundamental factors such as relative interest rates and economic growth. A forward trade is any trade that settles further in the future than spot. The forward price is a combination of the spot rate plus or minus forward points that represent the interest rate differential between the two currencies. Most have a maturity less than a year in the future but longer is possible.
Like with a spot, the price is set on the transaction date, but money is exchanged on the maturity date.
What is Forex Trading?
A forward contract is tailor-made to the requirements of the counterparties. They can be for any amount and settle on any date that is not a weekend or holiday in one of the countries. A futures transaction is similar to a forward in that it settles later than a spot deal, but is for standard size and settlement date and is traded on a commodities market. The exchange acts as the counterparty.
As a result, the trader bets that the euro will fall against the U. Over the next several weeks the ECB signals that it may indeed ease its monetary policy. That causes the exchange rate for the euro to fall to 1. The difference between the money received on the short-sale and the buy to cover is the profit.
Had the euro strengthened versus the dollar, it would have resulted in a loss. The foreign exchange market is extremely liquid and dwarfs, by a huge amount, the daily trading volume of the stock and bond markets. By contrast, the total notional value of U. When you're making trades in the forex market, you're basically buying the currency of a particular country and simultaneously selling the currency of another country.
Traders are usually taking a position in a specific currency, with the hope that there will be some strength in the currency, relative to the other currency, that they're buying or weakness if they're selling so they can make a profit.
Leverage and Margin Explained
In todays world of electronic markets, trading currencies is as easy as a click of a mouse. There are no clearing houses and no central bodies to oversee the forex market which means investors aren't held to the strict standards or regulations as those in the stock, futures, or options markets. Second, there aren't the fees or commissions that exist for other markets that have traditional exchanges.
There is no cutoff time for trading, aside from the weekend, so one can trade at any time of day. Finally, its liquidity lends to its ease of trading access. Accessed Feb. Bank for International Settlements. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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Forex Trading example
Part Of. Basic Forex Overview. Key Forex Concepts. Currency Markets. Advanced Forex Trading Strategies and Concepts. Table of Contents Expand. What Is Foreign Exchange — Forex? How Does the Forex Work? Trading in the Forex Market. Differences in the Forex Markets. The Spot Market.
Forex simply explained -
The Forward Market. The Futures Market. Example of Foreign Exchange. Frequently Asked Questions. What Is Foreign Exchange Forex?
