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Forex Trading
Forex is a commonly used abbreviation for foreign exchange. It typically describes the buying and selling of currency in the foreign exchange market, especially by investors and speculators. The familiar expression, buy low and sell high, certainly applies to currency trading. A forex trader purchases currencies that are undervalued and sells currencies that are overvalued, just as a stock trader purchases stock that is undervalued and sells stock that is overvalued.
This is similar to stock trading. A stock trader will buy a stock if they think its price will rise in the future and sell a stock if they think its price will fall in the future. Similarly, a forex trader will buy a currency pair if they expect its exchange rate will rise in the future and sell a currency pair if they expect its exchange rate will fall in the future.
The foreign exchange market is a global decentralized marketplace that determines the relative values of different currencies. Unlike other markets, there is no centralized depository or exchange where transactions are conducted. Instead, these transactions are conducted by several market participants in several locations. It is rare that any two currencies will be identical to one another in value, and it’s also rare that any two currencies will maintain the same relative value for more than a short period of time. In forex, the exchange rate between two currencies constantly changes.
Currencies trade on an open market, just like stocks, bonds, computers, cars, and many other goods and services. A currency’s value fluctuates as its supply and demand fluctuates, just like anything else.
Trading goes on all around the world during different countries business hours. You can, therefore, trade major currencies at any time, 24 hours per day. Since there are no set exchange hours, it means that there is also something happening at almost any time of the day or night.
Unlike many other financial markets, where it can be difficult to sell short, there are no limitations on shorting currencies. If you think a currency will go up, buy it. If you think it will fall, sell it. This means there is no such thing as a “bear market” in forex – you can make (or lose) money any time.
Because of the deep liquidity available in the forex market, you can trade forex with considerable leverage typically 200:1. This can allow you to take advantage of even the smallest moves in the market. Leverage is a double-edged sword, of course, as it can significantly increase your losses as well as your gains.