Forex: How does it work?
FOREX or foreign exchange is said to occur whenever one currency is traded for another. And the market in which such a transaction takes place is said to be foreign exchange market. FOREX is by far the largest market today. Approximately, $1.9 trillion worth of currency is traded everyday.
The values of the currencies fluctuate in respect to other currencies. Take for example the EUR-USD pair (the price of Euros in Dollars) and GBP-USD (the price of the United Kingdom Pound in US dollars).Suppose there is good news from Euro countries and bad news from Great Britain, it may so happen that EUR-USD goes up and GBP-USD goes down. It means that it would be now less expensive to buy Pounds.
Most FOREX markets allow 100:1 leverage, and calls for you to have a sum of cash in your account as a safeguard next to a decisive loss point. For example, the dealer may be asked to put $1000 to control position worth $100,000 for EUR/USD on 100:1 leverage.
FOREX market dealers in general employ systems to shut out systems when clients finish off their margin. If the dealer has $2000 deposited in his account, but he is purchasing a $100,000 worth of EUR-USD, he should have $1000 tied up for margin.
Three numbers are shown on a trader’s trading platform related to his account: his equity, his balance and his margin. The Forex market fluctuates a lot and if you have kept a shallow margin, you may be closed when actually the market might have recovered. Also, more number of positions means more number of risks.
Market makers charge their fees in pips (1 pip = 1/100 of a percent) at the beginning of the trade; this transaction cost is subtracted only upon entering the trade, not leaving it and can amount to a significant sum.
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12-28-2007, 08:30 PM
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