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Forex and the Risk Element

Forex and the Risk Element



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What Is The Forex?

By : Gerald Mason
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Simply put, the Forex is the foreign exchange market. It's where travelers, banks, and companies that do business internationally change money, in effect buying one currency and selling another.

Profits are made from the difference in value between the two currencies (the exchange rate). Because currencies are no longer tied to the gold standard, exchange rates are constantly fluctuating. Speculators trade currencies with the expectation that one will gain in strength against the other. These trades are leveraged, with a small downpayment controlling a much larger sum, so even small changes in value can create large profits or losses.

The Forex is the mother of all markets, with trading of more than U.S. $1.5 trillion daily. That's more than one hundred times the size of the New York Stock Exchange. Because the market is so large, it's extremely liquid; there's always an immediate buyer or seller for any of the major currency pairs. Most of this trading is done for profit; only five percent of the trades made each day are for the purpose of changing currencies for business or travel.

The Forex market is also so large that it cannot be manipulated. Even powerful central banks can't force the market to do their bidding, as the Bank of England found out in 1992. When the BoE used its reserves to support the pound against the Euro, investors traded against the pound and by sheer numbers overwhelmed the BoE. It's rumored that one investor, George Soros, made a profit of U.S. $1 billion overnight.

The Forex is a completely virtual marketplace. There's no building where buyers and sellers meet, or where brokers hang out looking for action. All trading takes place over the telephone or on the Internet. Small investors trade through currency brokers, who in turn place their orders through large banks. Commissions are low and are built into the exchange rate.

It was once said that the sun never set on the British Empire. The same can be said for the Forex trading "day," which lasts roughly six days. It opens in Sydney with the local Monday morning, then moves with the sun to Tokyo, Frankfurt, London, and finally New York, ten back around again to Sydney. It closes in New York on Friday evening. This means that, at any time of the day or night during each work week, some currency, somewhere around the world, is actively trading. The clock may say it's midnight, but there are still opportunities to make money on the Forex.

These long trading hours allow investors to speculate on the results of world events as they're happening. If a country has announced that it will release data relating to its economic growth or decline, an investor can take advantage of the influence of that announcement on the country's currency--even if it's taking place during his night.

The Forex used to be closed to small investors. It was the private playground of banks, large corporations, and the major players in the money-making game. But a change of laws in 2000 opened the field to everyone. Now online Forex dealers offer multiple options for the small trader or investor, with trading accounts as low as U.S. $300.

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