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The Foreign Exchange market is known by several
names including "Forex," “FX," the "Forex spot
market," or "Spot FX." A "spot" market refers
to any market that deals in the current price
of a security.
No matter which name you use to describe the
Forex marekt, it is the largest financial
market in on Earth. The daily volume for the
Forex market exceeds $2 trillion a
day.
Compare that to the average daily volume of
about $25 billion that the New York Stock
Exchange trades, and you will quickly realize
how absolutely tremendous the Foreign
Exchange really is. It literally equates to
more than three times the total dollar value of
both the stock and futures markets
combined!
Forex trading involves the simultaneous
purchase of one currency and the sale of a
second currency. These currency transactions
are processed through a broker or dealer, and
are traded in pairs. Popular currency pairs
include the Euro and US dollar (EUR/USD), as
well as the British Pound and Japanese Yen
(GBP/JPY).
Currency trading can be confusing for the
uninitiated. You are not purchasing stock, or a
futures contract. Instead, the transaction
involves swapping one currency for another with
the expectation that the valuation of the two
will diverge. One way to conceptualize this is
to think of buying a currency as the purchase
of shares in a particular country.
When you buy a country's currency, you are in
effect purchasing a piece of that country's
economy because the value of a country's
currency is a direct reflection of what the
market, as a whole, perceives as the current
and future health of the national economy.
Generally, the exchange rate of a currency,
versus other currencies, is a reflection of the
one nation's economy compared to the other
country's economy. As one nation struggles,
it's currency will weaken in comparison to
those nations that continue to see sound
economic growth. So, as global economic
conditions change there will be corresponding
changes in the value of one nation's currency
as compared to the others.
From a fundamental perspective, a currency
trader seeks out opportunities to exploit the
rise of stronger currencies versus weaker
currencies in a given pair. He will do this by
buying the stronger currency, while selling the
weaker component. As the discrepancy of those
two currencies widens, a profit is
realized.
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