The Forex Market: Understanding Exchange Rates and How to Trade Currency Pairs For Fun and Profit

If you watch one of the financial or news channels on television such as CNBC you will see that one of the metrics that gets reported regularly is exchange rates between the major global currencies such as the US dollar, the Euro, and the British pound. Exchange rates fluctuate up and down just as much as the stock market indices do because of economic and geopolitcal factors, as well as ordinary trade activity and commerce between countries.

When you see an exchange rate quote for a currency pair it is not too difficult to understand exactly what it means. An exchange rate can never be just one currency, instead it is one currency relative to another currency and the first currency in the pair is always valued at one. For example, if you saw an exchange rate quote that says EUR/USD at 1.2500, what this is telling you is that one Euro can be exchanged for one dollar and twenty five cents.

Many people believe that the stock market is the largest market in the world, but the truth is that it is actually the foreign exchange currency market that has the highest price volume of trading activity on a daily basis. Much of the foreign exchange market is due to international trade and commerce where a company or an individual will exchange their native currency into the currency of the country they are doing business in.

But a large amount of the foreign exchange activity that takes place in the global marketplace is speculative in nature, meaning that people just like you are studying the current exchange rates and placing bets as to which currency will go up or down in value. If this seems like a strange concept, here is another example to illustrate how to trade currency pairs for profit: If the EUR/USD rate starts off at 1.25 on Monday and ends up at 1.30 on Friday, you could have earned extra money over the course of the week by switching a certain amount of dollars into euros.

Many of the big foreign exchange brokers today give you the option of leveraging your money at a certain amount such as 20:1, meaning that with $1,000 you could trade a position of $20,000 at that leverage rate. This type of leverage can magnify losses and gains by a factor of 20, so while it can be risky there is also the opportunity for rewards. By understanding how the foreign exchange market works, you will no longer be confused by the exchange rates that flash on the television screen and you can even trade in this market as a currency trader.

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