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Foreign exchange, or forex, is the simultaneous exchange of one national currency for another. Currency dealers provide foreign exchange for the purpose of investor speculation. The investor wishes to buy or sell one currency for another with the hope of making a profit when the relative value of the currencies changes in favor of the investor, whether from market news or world events. This market has higher daily volume between buyers and sellers than any other in the world. Taking place in the major financial institutions across the globe, the forex market is open 24 hours a day.
Placing a trade in the forex market is simple. The mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless. In the forex, you may buy or sell currencies with the objective of earning a profit from your position. For example, if you buy a currency and the price appreciates in value, then you earn a profit by closing your position. When you close your position by selling the currency back to lock in the profit, you are actually buying the counter-currency in the pair.
There are two rates for all currency pairs: the bid, or the rate at which traders can sell, and the ask, or the rate at which traders can buy. There is a small difference in price between the two, known as the spread, which defines the cost of the trade. Spreads are a part of all markets, but are typically hidden in the broker-based equities and futures markets. When trading directly with your currency dealer, there are no commission charges.
Leverage is the process by which a trader can take a market position much larger than the value of the trader's account. Your currency dealer may allow you to take positions up to 100 times the value of your account. However, we do not recommend using leverage of more than 10 times your account value, because leverage exaggerates both gains and losses. Even when market conditions are relatively calm, employing leverage can generate large gains or losses. In the case where a trader surpasses the maximum allowed leverage (which can happen when account equity shrinks as a result of trading losses), the currency dealer will close all open positions in the account.
For positions open at 5 p.m. EST, there is a daily rollover (interest payment) that you either pay or earn on an open position, depending on your established margin level and position in the market. If you do not want to earn or pay interest on your positions, simply make sure they are closed at 5 p.m. EST, the established end of the market day.
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