Forex is an inter-bank market that took shape in 1971 when global trade shifted from fixed exchange rates to floating ones. This is a set of transactions among forex market agents involving exchange of specified sums of money in a currency unit of any given nation for currency of another nation at an agreed rate as of any specified date. During exchange, the exchange rate of one currency to another currency is determined simply: by supply and demand – exchange to which both parties agree.
Forex is said to be “the fairest market on earth” by some because of its sheer size, and number of participants. No one player, not even the central bank of a particular country, can completely control the market direction.
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, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar. (Dated September 2016)
Margin is essentially collateral for a position. If the market moves against a customer’s position, additional funds will be requested through a “margin call.” If there are insufficient available funds, immediately the customer’s open positions will be closed out.
Clients can buy or sell a financial product with substantially less money than the actual full market value of that financial product. A position in a contract with high gearing or leverage stands to make or lose a large amount from a small percentage movement in the underlying instrument.
If you are buying some currency, you are opening a ‘long’ position, if selling – ‘short’. For example, if you buy 1 lot of EUR/USD, it means you open long position for 100,000 of EUR against USD. And of you sell 10 lots of USD/CAD that means you open short position for 1 mln of USD versus CAD.
Currency prices (exchange rates) are affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability. Moreover, governments sometimes participate in the forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower price, or conversely buying in order to raise the price.
The most common risk management tools in forex trading are the limit order and the stop loss order. A limit order places restriction on the maximum price to be paid or the minimum price to be received. A stop loss order sets a particular position to be automatically liquidated at a predetermined price in order to limit potential losses should the market move against an investor’s position. The liquidity of the forex market ensures that limit order and stop loss orders can be easily executed.
Currency traders make decisions using both technical factors and economic fundamentals. Technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analysis to identify trading opportunities, whereas fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumour.cv
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