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Taking The First Steps In Forex

By : John Philips
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The trading of individual worldwide currencies is the primary function of the foreign exchange market. The U.S. Dollar, Yen, Euro, Swiss Franc, Pound Sterling, Australian Dollar, and Canadian Dollar are the currencies that are involved in the greater number of trades, but many additional denominations are exchanged on a lower scale. The U.S. Dollar is involved in over 90% of all exchanges on the forex markets.

The forex market is, despite the popular impression, a composite of several contrasting markets, each of which sustains its own rules and regulations, with no one centred market in which all currency trading takes place. The major markets, the U.S., London, and Tokyo, open during different hours because of the different time zones. When the New York market opens, and while the European markets are still operating, is when trading is heaviest and nearly two thirds of the trading action happens during this convergence.

An individual exchange rate for a given currency does not subsist since there is no centred market. The bid and ask rates for a currency whilst normally reasonably close to each other, can, because of the over-the-counter (OTC) nature of the markets, deviate among dissimilar geographic markets and market makers.

Three letters express an international currency code for every currency and because the price of a currency must be applied in reference to another currency, it is displayed in the form XXX/YYY. The price of the British Pound in U.S. Dollars is recorded as GBP/USD, for instance. Acknowledged as the base currency, and the securest currency when the pair was made, is the first in the pair while the other currency is known as the counter currency. Presented in decimal form the real prices themselves are normally rounded to the nearest ten-thousandth of a unit.

The forex market forms the biggest marketplace in the world and approximately $1.9 trillion is traded daily. Forex trading is largely a speculative, short-term market with close to 80% of trades in play for less than a week. With the many traders covering the world and the very high daily turnover it is an extremely liquid market, a great deal more so than equities.

The top ten most active traders, however, are responsible for nearly three quarters of total dealing volume. The trading activity that happens within the interbank market, which is formed by international banks, provide the market with bid and ask prices that are far closer than retail customers can get.

Forex futures contracts, that are derivative instruments that are also actively traded was inaugurated in 1972 at the Chicago Mercantile Exchange, and are responsible for about seven percent of the total foreign exchange volume.

An additional accepted hedging method that has also taken hold is foreign exchange options. These derivatives, which are declarations to buy currency at a specific price on a future date, are purchased by investors to compensate the turn down in the price of a currency and any conceivable losses they might have to bear.

An additional means by which traders are capable of mitigating risk is through an exchange, in which both parties agree to switch one currency for another for a set period of time, and will then reverse the transaction after the period runs out.

The foreign exchange market is a fast-paced, international currency exchange that is without contention amid financial markets. The forex market is ensured into the future and its growth all but guaranteed because of its popularity amongst the international companies, prominent banks and financial organisations.

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