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Understanding the Foreign Exchange Market

The currency market has been setting record highs as well as record lows. In fact, the foreign exchange market has been dominating the headlines. However, it is important to know what these headlines mean and whether this is the best time to begin investing in this exciting market.

First, you must understand that the FOREX market is risky. You must be willing to risk your money in order to make money. The only time you should invest in the foreign exchange market is when you have money that you can afford to lose. However, it should be noted that the risk of losing money is the potential to gain money; so, don’t let this turn you off from taking a change in this exciting market.

What is Forex?

Currency prices rise and fall every day. What many people do not know is that there is a market where you can profit from the changes in the value of the currencies. To help you understand how much money you can make in this exciting investment opportunity, let’s take a look at George Soros. He made a billion dollars in one day trading currencies. You should be aware that currency trading does involve significant risk and you can lose a lot of money. Technological advances have made trading on the Forex more accessible, thus increasing the growth of online trading. You no longer need a money manager to trade in this market. In fact, almost anyone can be an investor in the Forex market.

Forex Explained

Forex is the largest financial market on the planet, averaging more than $3.2 trillion of trading each day. To help you better understand the size of this market, the New York Stock Exchange averages $55 billion of trading each day. If you put all the world’s futures and equity markets together, the combined trading volume would only be one-quarter of the amount of trading done on the Forex market. Because of the volume of trading on this market, transaction prices are much lower than they are in other markets. Here are a few of the benefits of trading on the Forex market rather than the stock market.

1. You may not be charged commissions. Oftentimes, you only pay for bid/ask spreads.

2. The foreign exchange market is open 24 hours a day. This mean you can decide when and how to trade.

3. You are able to trade on leverage. Although it can magnify potential gains, it can also magnify potential losses.

4. You can concentrate on just a few currencies rather than thousands of different stocks.

5. You do not need a lot of money to start trading.

How is Forex traded?

How you trade on this market is almost identical to trading in other markets. However, instead of keeping up with numerous stocks, you will need to keep track of a couple of currencies- the one you are buying and the one you are trading. These currencies are quoted in pairs, such as USD/JPY or EUR/USD. The exchange rate shows the purchase price between the two different currencies.

Understanding the RisksForeign Exchange Market Risk

Finally, you must understand that trading on margin on the foreign exchange is risky and may not be suitable for you. Before you decide to begin trading on the foreign exchange market, you must carefully consider how much risk you are willing to take, your level of experience and your investment objectives. Because of the risk associated with the foreign exchange market, you must determine the amount of money you can comfortably lose. If you have any questions or concerns about investing in this market, speak to an independent financial advisor.

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