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HOW THE FX MARKET WORKS
HOW THE FX MARKET WORKS
HOW THE FX MARKET WORKS - A BRIEF OVERVIEW
The FX market, also known as FOREX, foreign exchange or currency trading, is a 24 hour venue where traders can go to speculate on the future value of currency prices. A major difference between FOREX and other markets is that currencies always come in pairs. For example, when one trades the US dollar it must be valued against another currency, for example, the Euro. This relationship is what causes currency prices to fluctuate, or move up and down. For example, when the euro is weak, then the dollar is stronger and vice versa.
In order to speculate on currency prices, traders must use software, for example the Hydra Markets trading terminal. It’s quite an easy process, one simply logs into the software and the rates for the various currency pairs are displayed, showing prices in real time.
It is important to understand that prices in the FX market will often look different compared to other markets. For example, one might see the current price for EUR/USD listed as 1.17245 the first question that comes to mind is why such a long value? The answer here comes down to leverage.
FX trading involves an extension of credit provided by the broker which is referred to as leverage. On an average day the Euro will either move up or down by about one cent. A single trade of this amount is not interesting; however, if one were to trade 10,000 Euros then a one cent move will result in a larger sum of money. By taking advantage of leverage traders can enter far larger transaction sizes than 10,000. Leverage, however, is known as a double edged sword because one is exposed to losses as well as gains in an equal amount. For this reason, newcomers to the market should exercise extreme caution and trade smaller values until they become more comfortable.
The next important concept to understand is margin. This simply refers to the amount of funds one must set aside to enter a trade. One can view margin as a good faith deposit. In order to receive a certain amount of leverage, a trader must set aside a small portion of their deposit as margin. For example, a broker offering a 1% margin requirement would require a trader to set aside $100 USD in order to trade 10,000 units of currency. Here, the $100 USD in this example represents 1% of $10,000 USD, hence 1% margin.
Now that we’ve covered margin and leverage, let’s get into a sample trade scenario. Imagine a trader buys EUR/USD at the value of 1.24100. You will notice that there are actually two prices displayed on the trading screen, with a small value between them. For example you might see EUR/USD displayed as 1.24100 / 1.24103 this tiny difference is referred to as the spread and is how brokers earn their revenue. Each time a trader enters a position, the broker will capture this difference as a service to its clients
Why don't you take a look for yourself on how the FX market works by trying a free Hydra demo account by clicking here or on one of the below links?
The speculation of both leveraged foreign exchange (FX) and Contracts For Difference (CFDs) products is undertaken in order to potentially earn a profit from the price difference between the opening and closing of the transaction. Because leverage can work either in favour of or against the investor, FX and CFD transactions carry an extreme level of risk. For these reasons, FX and CFD trading may not be suitable for all investors as it is possible to lose a partial or full amount of the invested capital. You should only trade with capital that you are willing to lose. In addition, before making any trading decisions, it is highly suggested that you review the associated risks while taking into account your investment objects and level of experience. Past trading performance is not a reliable indicator of future performance. If you have any doubts, seek independent advice from a financial advisor.
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