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Understanding foreign market trading

It’s impossible to spend time around traders today without hearing talk of forex and the foreign markets. Unless you’ve explored these areas directly, what you hear might not make a lot of sense, especially as there’s a lot of very specific terminology involved. What do you need to know to get your head around the basics, and could it be for you?

What is forex trading

Most traders only engage with the foreign markets when trading forex – that is, concerning themselves directly with the foreign exchange rates. Forex trading involves making predictions about which way any one currency will move in relation to another, with those involved able to take either long or short positions and profit when they get it right. Doing it successfully requires keeping up to date with a variety of market indicators as well as political and military issues, so most traders focus on currency pairs they know well.

Trading other assets through foreign exchanges

Alongside this, traders sometimes engage in trading other types of assets – notably stocks and commodities – through exchanges in other countries. This isn’t an option everywhere, but more and more exchanges have opened up to traders from elsewhere in recent years. This gives you access to a wider range of assets, but the flip side is that you’ll need to keep exchanging currencies in order to do it. Forex can be useful for hedging your trades so that you don’t lose money if the currency pair in question shifts against you between the time of making the deal and the time of making the exchange.

How the banks manage currency

At its root, the currency exchange process is managed through the interbank market, which facilitates the shifting of material currency and its maintenance in nostro accounts. What is nostro? It’s essentially a separate foreign currency bank account set up within a bank account in the currency of the nation where it’s located. It simplifies the exchange process by making it possible for an organization to maintain a balance across multiple currencies as required. Brokers use this system to make forex and foreign market trading practicable within reasonable timeframes.

How brokers operate

How is it possible for anyone to make money from currency exchange when the margins involved are so small? Brokers either charge fees for access or take a fractional amount from each trade, and they make profitable trading possible for their customers by offering leverage. What this means is that they lend you money to trade with so that you can bet on large numbers of currency units at once. The advantages of this for the client are obvious. The flipside is that it’s possible to make heavy losses if trades go wrong, so traders need to make their decisions carefully.

Foreign trading may look complicated but isn’t difficult to get the hang of once you give it a try. Doing it successfully is something else again, but with hard work and a willingness to learn, there’s no reason why you couldn’t make a success of it.

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