How the Forex Market Works

by Team Dinks on October 5, 2014 · 0 comments

forex marketYou’ve probably heard of the Forex Market, or Foreign Exchange Market, by now. It’s the biggest market in the world with trillions of dollars exchanged every single day.

Investors have also been using the Forex Market as another way to get a return on their money. But before we get to that, let’s first take a look at how the Forex Market works.

How it Works

Imagine this: you live in the US but you’re on a trip to France. When you get to France no one wants to take your US dollars. Instead you have to trade your money for Euros. You just exchanged a currency.

That’s how the Forex market works.

When businesses purchase products or services from other countries they have to first exchange their currency. This is because currency valuations differ. The US dollar is not worth the same amount as the Euro and vice versa.

How Can You Make Money?

It make sense to trade in currencies when doing business in another country but what often baffles people is how you could actually earn money by trading currencies.

Here’s how it works: investors will speculate on what currencies will go up in value and what currencies will go down in value. If they think a currency will go up they’ll buy and if they think a currency will go down they’ll sell.

Currencies can go up and down in valuation depending on monetary policies, political policies, and imports and exports, just to name a few.

The thing is, most currencies do not fluctuate in value more than one percent per day. That means to really make money you’d have to invest a lot of money.

How Forex Trading Works

Forex Trading is done in pairs. For instance, when you go to buy a currency you’ll see a pair listed side by side.

Example: USD/Euro

This first number in the currency pair is referred to as the base or bid currency and the second is the quote of ask currency. This tells you how much of one currency you’ll pay for the other.

In order to make money you have to determine which currencies you think are going to move one way or the other. And like we already discussed, since currencies don’t fluctuate much you have to put a lot of money up in order to see a high return. This is where leverage comes in.

Leverage is like a loan your Forex Broker will give you. It allows you to put down a small amount of money and bid a large amount of money. Leverage is a very high risk high reward game and should be proceeded with caution.

Is Forex Trading Right for You?

Forex trading requires a high level of speculation and in some cases a really high level of risk. Before you get started make sure you educate yourself as much as possible. Consider signing up for a demo or simulation so that you can practice first!

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