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Understanding the Forex Market

May 21, 2008  |  Difficulty: Easy

Forex, or FX, stands for the foreign exchange market. This is a 24-hour market in which currencies are traded in cash. It is also known as a spot market. There is no central trading center like a stock exchange. Trade is conducted "over-the-counter" via an international network of dealers. Until recently, the forex market used to be confined to larger traders, such as major international and investment banks, international corporations, international money brokers and currency traders. When the United States went off the gold standard in 1971, investors began to recognized new ways to bring in profits. As you begin researching the markets and gain an understanding the Forex market, you will want to choose a good Forex broker. There are many start-up brokerage firms that cater to smaller institutions and investors so they may participate in spot forex trading.

A prime factor to take into account before participating in the spot market is your personal temperament, and a good broker will help you to accurately assess that. If you are afraid of risk, this may not be a suitable marketplace for you. A good broker will be able to help you account for not only your experience in the investment world, but your objectives, and your ability to absorb financial losses. Your broker will help you make sure that you never invest any amount of money you cannot afford to lose.

Choosing the best forex broker for your personality and goal is important. The best currency trading broker provides you with the services you are looking for and you are not charged for unnecessary services that you don’t need. You will want to find a broker who can simply explain the purpose of trading, which is to buy low and sell high. The foreign currency market FOREX is no exception. The goods traded on this market are rates of currencies of different countries. As with any other good, the currencies have their prices.

To settle transactions between businesses located in different countries, governments, speculative transactions and so forth, banks around the world execute currency trades on the Forex Market. Depending on various trade, interest rates, central bank policies, time of the day, and anticipations of the market players, prices of currencies stay in ceaseless motion.

Your broker’s task as a trader is to determine the trend of the rate and buy an appreciating currency or sell a depreciating one, and then take your profits through execution of a reverse transaction.

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