In the foreign exchange market what exactly are you buying and selling?
The foreign exchange market deals in currency. It is a speculative market where no physical exchange of currencies ever takes place. The trades exist simply as computer entries and are netted out based on market worth. For dollar-denominated accounts, all gains or losses based on the dollar and registered as such on the trader’s account. You are exchanging real funds and can experience loss of real currency or a gain of real currency.
The first and foremost purpose the foreign exchange market is to facilitate the exchange of one currency pair into another for firms who trade currencies on a regular basis. One example of this maybe for the purpose of payroll, payment for products and services from foreign vendors, and merger and acquisition activity. Individuals enter the foreign exchange market in hopes of making a profit by trading pairs of currencies.
What does it mean to trade in pairs?
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Simply that, in forex exchange you are trading one currency for another currency. Currency is always traded in pairs. So if a trader sells one standard lot the equivalent of 100,000 units of EUR/USD what they have done is exchanged euros for dollars. The object is to make a profit on the exchange. Even though no physical currency is trading hands the transactions are very real as are the consequences of such transactions. These trades can lead to profit or loss of the funds for the trader.
Should you enter the currency market?
Only you can decide if trading in the currency market is right for you. Currency trading is considered high risk trading and the potential for loss of funds is there. Before entering the market you should take the time to learn about the currency market, explore how various trading systems operate, take advantage of demo accounts to gain a greater understanding and perhaps take a course in trading or employ a mentor.