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How the forex market works


Foreign Exchange is the simultaneous buying of one currency and selling of another. Currency quotes are given as exchange rates; that is, the value of one currency relative to another. The relative supply and demand of both currencies will determine the value of the exchange rate. In forex trading, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. A short position is one in which the trader sells a currency in anticipation that it will depreciate.

When a currency trader places a trade he wants the currency purchased to appreciate in value versus the currency sold. If the direction of the exchange rate moves in the direction he predicted, then he has just made a profitable trade. The amount of gain and loss depend on how far he holds on the winning or losing trade before realizing that particular trade.

In each open position, a trader is long in one currency and shorts the other. Forex traders express a position in terms of the first currency in the pair. For example, someone who has bought dollars and sold yen (USD/JPY) at 106.68 is considered to be long US Dollars and short Yen.
 

 

 


The most often traded or 'liquid' currencies are those of countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily transactions involve trading of the major currencies, including the US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

The forex market is considered an Over The Counter (OTC) or 'Interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Thus, trading is not centralized on an exchange market like the stock markets and futures markets. A true 24-hour market, forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Therefore forex market traders are able to respond to currency fluctuations caused by economic, social and political events at the time they occur immediately either day or night.

 

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