Make Money From Forex
Currency exchange is the trading of one against another
. Professionals point to this as foreign exchange, but may also use the acronyms forex or FX. Currency exchange is need in many circumstances. Consumers normally meet when they travel. They go to a bank or exchange bureau to transform their "home currency into the currency of the country they intend to travel to.
They may also pay for goods in a remote country or via the internet with their credit card, in which case they will realize that the amount they paid in the foreign currency will have been transform to their home currency on their credit card statement.
Although every exchange is a relatively small transaction, the aggregate of all such transactions is significant. Businesses normally have to transform currencies when they do business outside their home country. They exporting goods to another country and receive payment in the currency of that foreign country, then the payment must often be converted back to the home currency.
Similarly, if they have to import goods or services, then businesses will often have to pay in a remote currency, requiring them to transform their home currency into the foreign currency first. Large companies convert big amounts of currency annually. The timing of when they transform can have a large impact on their balance sheet and bottom line. Investors and speculators need exchange any time that they trade in any foreign investment, be that equities, bonds, bank deposits, or real estate.
Investors and speculators also trade currencies absolutely in order to take advantage of movements in the exchange markets. Commercial and investment banks trade currencies serve purpose for their commercial banking, deposit and lending buyers. These institutions also mostly participate in the market for hedging and proprietary trading purposes.
Governments and central banks trade currencies to improve trading conditions or to intervene in an attempt to adjust economic or financial imbalances. Even though they do not trade for speculative circumstances, they are a non-profit organization; they often use to be profitable, since they mostly trade on a long-term basis.
Currency exchange rates are determined by the exchange market. An exchange rate is normally given as a pair consisting of a bid price and an ask price. The ask price applies when purchasing a pair and represents what has to be paid in the quote currency to obtain one unit of the base currency. The bid price applies when offering and represents what will be obtaining in the quote currency when offering one unit of the base currency. The bid price is constantly lower than the ask price.
Buying the pair implies purchasing the first, base currency and offering, short, an equivalent amount of the second, quote currency, to purchase the base currency. It is no need for the trader to own the quote currency prior to offering, as it is offering short. A speculator pays for a pair, if she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up. Offering the pair implies offering the first, base currency, short, and purchasing the second quote currency.
A speculator markets a pair, if she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency. After purchasing a pair, the trader will have an open position in the pair. Right after such a transaction, the value of the position will be roughly zero, because the value of the base currency is equal to the value of the equivalent amount of the quote currency. In fact, the value will be a little negative, due to the spread involved.
by: Calvin Tan
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