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Forex - FX - Foreign Currency TradingForex for beginners or Forex for dummiesAlso at times referred to as currency trading, the Forex market is a hot topic both in the investment world as well as the business opportunity world. My first introduction to the Forex foreign currency exchange was through a good friend of mine who has learned to trade in the market over the last six months and is getting ready to "go live" or open an account with real money to test his skills. I recently sat down with him and asked him to explain to me how currency trading works. Contained below is what I took from this conversation, and a good beginner article for anyone who wants to know more about the market. What is the currency trading market?To put it simply, it is the largest financial market in the world with almost 2 trillion in daily turnover. (Based on the United States dollar.) Basically when you trade on the market, you are exchanging the currency of one country for the currency of another, so every exchange contains the currencies of two countries, often called pairs. Examples of trading pairs would be the US dollar vs. the Euro or the Pound against the Euro, etc. The market is based on exchange rates. Consider if you have ever traveled to another country and exchanged your native money for the currency in use in the other country. This is basically what you are doing as you hope to gain a profit. You gain profit by correctly estimating the rise of value in one currency against the other. The Forex market was created as merchants sold their products to foreign companies and/or consumers and were paid in the foreign currency. They then have to convert the foreign currency to their native currency, just like we do when we travel abroad. Today the currency trading market is made up of roughly five percent of these merchant transactions, and close to ninety-five percent by people trying to profit from the fluctuations. How does this actually work?Here is an example of how it works. Different pairs are quoted different ways, but for our example we will use the US dollar against the Japanese Yen, which will be shown something like this. USD/JPY 1.3456. This means that one US dollar is equal to 1.3456 Yen. (This is a fictitious example, the Yen is actually much smaller than the dollar.) You decide that the US dollar will rise against the Yen and buy 10,000 dollars worth of the Yen. Later, the amount rises to 1.5456. You now sell the US dollars and buy the Yen in a single transaction. Your profit is 20 Yen. LeveragingThe power to make large profits in the Forex market come from the ability to leverage a large amount of capital in comparison to the amount you risk. The majority of the time you are only required to risk 1 to 10% of the amount you are leveraging, or trading. So to trade $100,000, you would only need $1,000 to $10,000. This may sound great, but you must realize that leveraging, or trading on margin, greatly magnifies both your profits and your losses. It is advisable to completely understand the terms and conditions of your margin account, which you must set up through a broker, to understand how it works, what you are responsible for, and how much risk you are actually taking. There are major risks in trading on the Forex market, just like there are on any market, but there are also potentially large gains as well. Your best plan is to acquire as much information as possible to make an informed decision. This market appears to be complicated, but once you start training and investigating it you can quickly grasp the concepts, and hopefully enter the world of successful Forex traders.
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