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What is Foreign Exchange?

The Foreign Exchange (Forex or FX) is one of the largest financial markets more liquid and the world. The Forex market is an OTC (Over The Counter), that unlike the stock exchange there is no single financial center of reference, there is no concentration of trade and transactions are not standardized. This feature, which also allows you to enter the market even with minimum amounts, was essential for the spread of the market in both geographical and in terms of accessibility to all types of agents. Can also decide from time to time the amount by which to enter the market allows anyone to take money management strategies and spatial allocation.

Forex is very easy to understand, just realize that a currency is effectively a commodity whose value can vary in relation to other currencies and other assets of value, like gold and oil.



Influences on prices in Foreign Exchange

There are many factors determining the value of a freely floating currency in the foreign exchange market, among them, the international trade flows, the economic and political conditions, the level of interest rates or simply the interaction of supply and demand in the short term . Unlike other activities, the circuit of the Forex market is a pure state, and prices (exchange rates) are free to move upward or downward.


OTC Market

The Forex market is mostly an Over-The-Counter (OTC). Most of the trading does not occur in a single regulated market. That is why, despite its huge size, the Forex is still a mystery to many investors. However, technological progress has made the market more transparent, while opening the participation of a new generation of investors. The Forex operates virtually 24 hours a day, 7 days a week, an increasingly high proportion of transactions take place electronically.


The main participants of the Foreign Exchange

We can distinguish some key groups of participants in the currency market:

  • Hedgers (hedgers)
    In this group the majority are companies that deal with import-export, or are financed in foreign currency. Their intention is to reduce the risk. They are mainly medium and large businesses to international trade, however, recently, due to the external debt of natural persons can be added to this group and private investors.
  • Traders (speculators)
    Including both companies to private individuals investing in order to gain on price differences for futures contracts.
  • Arbitrageurs (arbitragers)
    This group provided a large capital investors, who carry out transactions simultaneously on a minimum of two markets to exploit price differences.
  • Market makers
    This is the institutions that deal with brokerage currency in circulation and in transactions between hedgers and speculators may be banks, brokers, stockbrokers or telematics platforms of trading.


Benefits of trading in Foreign Exchange

Market is open 24H
The Forex is a market that never sleeps. It is active 24 hours on 24 for almost 7 days a week. Most activity takes place between the opening hours of the New Zealand market on Monday morning - or Sunday night in Europe - and the closing time for the U.S. market on Friday evening.

The forex market is huge and is expanding rapidly. The daily turnover is currently over 3.2 trillion dollars. Technology has made the market accessible to almost everyone, and small traders have flocked en masse in the forex.

Ratios in the forex margin tend to be higher than trading stock, because the currency market is more liquid - there is almost always in the Forex market price - and then it is easier to liquidate positions.

Reduced spreads
In the forex market spreads - the difference between the demand price (bid) and bid price (ask) - are restricted. Suffice it to compare a 2 pip spreads in the currency pair EUR/USD with the price of shares more liquid and active. Moreover, the prices Forex are "valid" for amounts much higher than the stock market. The spread is the hidden cost, "intrinsic" trading, and Forex is minimal. Thanks to technology is now possible to extend these margins so narrow in almost all investors.

No commissions or transaction costs
Most OTC Forex trading is commission free, also, with spreads so low, the intrinsic cost of trading is far less than other assets such as equities. When you make a traditional trading markets generally have to pay a fee to the company that manages the stock exchange. In Forex, the absence of a centralized financial center, these costs are not required, redendo actually trading more profitable.

Profit potential regardless of market
The Forex market is a pure state. Prices may go up or down as easily. If a trader believes a currency is about to depreciate, there are no limits to the sale, but if the position is held for more than a day, there is a cost of detention (swap) which must be taken into account. In Forex there is always a potential for profit, regardless of whether the trader bought or sold and the fact that the market tends to rise or fall.

Equal access to market information
Despite the introduction in Europe and the United States, of rules on best execution, almost all agree that stock market traders, analysts, professionals and large investment companies have a huge competitive advantage over individual traders. The Forex market is a rather democratic, where all participants are given equal access to the same market information in real time.

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