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Basics of Foreign Exchange Markets

The foreign exchange or the forex market is where the buying and selling of different currencies takes place. The price of one currency in terms of another is called the exchange rate.

To buy goods or services from foreign country one needs to buy the currency of the market first or the transaction can take place with US dollars which is accepted everywhere.

The foreign exchange or forex market is actually a worldwide network of traders and financial institutions without any physical market or central place.

Three main centers of handling the majority of all forex transactions are United Kingdom, United States, and Japan followed by Singapore, Switzerland, Hong Kong, Germany, France, and Australia.

Trading goes on round the clock. It opens at 8 a.m. (GMT) in London and ends in Singapore and Hong Kong. At 1 p.m. (GMT) the New York market opens for business. As the market closes in San Francisco, the Singapore and Hong Kong markets start their day. Therefore, this is a seamless trading practice that goes on and on.

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The forex market is fast paced, volatile, and huge. There are four market participants: banks, brokers, customers, and central banks. Banks and other financial institutions are the biggest participants who earn profits by buying and selling currencies from each other.

Brokers are the linking element between banks. Dealers call them to find out where they can get the best price for currencies. They earn profit by charging commission on the transactions they arrange, this is called the spread.

Customers are mainly large corporations requiring foreign currency for doing business or investments. The other sections of customers are individuals and small traders who buy foreign exchange for specific usages or for trading

There are different types of forex transactions like spot, forward, futures, options, and swap. Forex or foreign exchange market is gaining popularity as one can earn short-term profits from fluctuations in exchange rates.

The main aim of any trader is to buy a currency cheap and sell it dearer. Small changes in exchange rates may seem insignificant. But as the volume of the transaction goes up a small percentage translates into huge profit.

Forex exchange rates get affected by many physical and psychological factors. These can be political developments, changes in tax laws or policies, stock market news, indication of inflation, government and central bank policies, etc.

There are fundamental and technical indicators, which can be applied to gauge the future market trends. With the advent of software and improved communication technologies, automated forex trading has become extremely popular.

Investors, not aware of intricacies of the forex market can now invest their money in forex trading.

For small or medium individual investors, forex market provides a good opportunity for earning profit. It is always better to learn the basics of the trading before going in for actual investment.

Educational material for forex trading is easily available from conventional or electronic sources. Well-researched information ensures handsome profit from forex trading.

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