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Foreign Exchange Explained

Forex, or foreign exchange, is the trading of one nation's currency for that of another. The Forex market is influenced by the supply and the demand for goods and services provided by each country in comparison to the supply and demand of goods or services provided in other countries.

The rate of exchange varies constantly, and is determined by evaluating what one nation's currency is worth in relation to that of another nation's currency. This rate is typically set by first determining the value of a base currency such as the American Dollar in relation to the given trading country's current base currency value. Once the exchange rate is determined, it is multiplied by the amount to be traded.

The frequency of exchange, direction of currency movement, as well as other real-time factors impact the values at which various currencies are exchanged. The majority of trading is accomplished via foreign exchange brokers. These transactions are completed continuously throughout the world.

The question that arises now is that why is there a need for foreign exchange? The main reason is international trade. We live in a world where there are many countries and each is unique in geography, natural resources and human capital. No single country is capable of producing domestically all the essentials to satisfy the needs of its citizens and certainly not at the lowest possible cost.

In the event of international trade, the purchaser's currency is exchanged for the seller's currency before the transaction is complete. As an example, if the United States were to purchase goods from Mexico, the United States would first convert their currency to that of Mexico, and then purchase the goods.

The investor's goal in Forex trading is to profit from foreign currency movements. In case you have a forecast that one currency would get higher to another you can exchange the second one for the first one and wait for the profit. If you are lucky to see the trades following your forecast you can make an opposite transaction and to exchange currencies back gaining the profit.

In some instances, participants are interested in exchanging currency for reasons other than profit. Corporations that maintain international operations might need to exchange currency to pay foreign employees, to pay for foreign good and services, or to convert currency from other countries in which they have sold goods or services to that of their own. Although this is common, a sizeable number of participants are simply currency traders much like brokers in the stock market. They frequently monitor the changes in the exchange rates and attempt to benefit from even the smallest variations.

Forex market doesn't have any exchange center unlike the stock market. Forex trading seem to go after the sun around the world, from banks of the United States to other parts of the world like Australia, New Zealand, the Far East or Europe and back to the US some time later. Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.

To find out more about what other forex traders think about various forex products and services, go to Forex Reviewer Central.






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