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¿ forex is a portmanteau ?

After the accord at in 1971, more major currencies were allowed to float freely against one another. The values of individual currencies vary, which has given rise to the need for foreign exchange services and trading.  and  conduct most of the trading in the forex markets on behalf of their clients, but there are also  opportunities for trading one currency against another for professional and individual investors.

Forex as a Hedge

Companies doing business in foreign countries are at risk due to fluctuations in currency values when they buy or sell goods and services outside of their domestic market.  provide a way to currency risk by fixing a rate at which the transaction will be completed.
To accomplish this, a trader can buy or sell currencies in the  or  in advance, which locks in an  For example, imagine that a company plans to sell U.S.-made blenders in Europe when the exchange rate between the and the dollar (EUR/USD) is €1 to $1 at parity.
The blender costs $100 to manufacture, and the U.S. firm plans to sell it for €150 – which is competitive with other blenders that were made in Europe. If this plan is successful, the company will make $50 in profit because the EUR/USD exchange rate is even. Unfortunately, the USD begins to rise in value versus the euro until the EUR/USD exchange rate is .80, which means it now costs $0.80 to buy €1.00.
The problem the company faces is that it, while it still costs $100 to make the blender, the company can only sell the product at the competitive price of €150, which when translated back into dollars is only $120 (€150 X .80 = $120). A stronger dollar resulted in a much smaller profit than expected.
The blender company could have reduced this risk by the euro and buying the USD when they were at parity. That way, if the dollar rose in value, the profits from the trade would offset the reduced profit from the sale of blenders. If the USD fell in value, the more favorable exchange rate will increase the profit from the sale of blenders, which offsets the losses in the trade.
Hedging of this kind can be done in the currency  The advantage for the trader is that  are standardized and cleared by a central authority. However, currency futures may be less than the forward markets, which are decentralized and exist within the i

Forex as Speculation

Factors like  trade flows, tourism, economic strength and affect supply and  for currencies, which creates daily  in the forex markets. An opportunity exists to profit from changes that may increase or reduce one currency's value compared to another. A forecast that one currency will weaken is essentially the same as assuming that the other currency in the pair will strengthen because currencies are traded as pairs.
Imagine a trader who expects interest rates to rise in the U.S. compared to Australia while the exchange rate between the two currencies USD) is .80 (it takes $.80 USD to buy $1.00 AUD). The trader believes higher interest rates in the U.S. will increase demand for USD, and therefore the AUD/USD exchange rate will fall because it will require fewer, stronger USD to buy an AUD.
Assume that the trader is correct and interest rates rise, which decreases the AUD/USD exchange rate to .50. This means that it requires $.50 USD to buy $1.00 AUD. If the investor had shorted the AUD and went  the USD, he or she would have profited from the change in value.

Currency as an Asset Class

There are two distinct features to currencies as an 
  • You can earn the  between two currencies.
  • You can profit from changes in the exchange rate.
An investor can profit from the difference between two interest rates in two different economies by buying the currency with the higher interest rate and shorting the currency with the lower interest rate. Prior to the 2008 financial crisis, it was very common to short the  (JPY) and buy  (GBP) because the interest rate differential was very large. This strategy is sometimes referred to as a "

Why We Can Trade Currencies

Currency trading was very difficult for individual investors prior to the internet. Most currency traders were large because forex trading required a lot of With help from the internet, a retail market aimed at individual traders has emerged, providing easy access to the foreign exchange markets, either through the banks themselves or  making a Most online brokers or dealers offer very high leverage to individual traders who can control a large trade with a small account balance.

Forex Trading Risks

Trading currencies can be risky and complex. The interbank market has varying degrees of regulation, and forex instruments are not standardized. In some parts of the world, forex trading is almost completely unregulated.
The interbank market is made up of banks trading with each other around the world. The banks themselves have to determine and accept  and , and they have established internal processes to keep themselves as safe as possible. Regulations like this are industry imposed for the 
Since the market is made by each of the participating banks providing offrs and  for a particular currency, the market pricing mechanism is based on Because there are such large trade flows within the system, it is difficult for  to influence the price of a currency. This system helps create transparency in the market for investors with access to interbank dealing.
Most small retail traders trade with relatively small and semi-unregulated dealers, which can (and sometimes do) re-quote prices and even trade against their own customers. Depending on where the dealer exists, there may be some government and industry regulation, but those safeguards are inconsistent around the globe. 
Most  should spend time investigating a forex dealer to find out whether it is regulated in the U.S. or the U.K. (dealers in the U.S. and U.K. have more oversight) or in a country with lax rules and oversight. It is also a good idea to find out what kind of account protections are available in case of a market crisis, or if a dealer becomes insolvent.

Pros and Challenges of Trading Forex

Pro: The forex markets are the largest in terms of daily trading volume in the world and therefore offer the most . This makes it easy to enter and exit a in any of   within a fraction of a second for a small  in most market conditions.
Challenge: Banks, brokers and dealers in the forex markets allow a high amount of , which means that traders can control large positions with relatively little money of their own. Leverage in the range of 100:1 is a high ratio but not uncommon in forex. A trader must understand the use of leverage and the risks that leverage introduces in an account. Extreme amounts of leverage have led to many dealers becoming insolvent unexpectedly.
Pro: The forex market is traded 24 hours a day, five days a week – starting each day in Australia and ending in New York. The major centers are Sydney, Hong Kong, Singapore, Tokyo, Frankfurt, Paris, London and New York.
Challenge: Trading currencies productively requires an understanding of economic  A currency trader needs to have a big-picture understanding of the  of the various countries and their inter-connectedness to grasp the fundamentals that drive currency values.
[Note: One of the underlying tenets of technical analysis is that historical price action predicts future price action. Since the forex market is a 24-hour market, there tends to be a large amount of data that can be used to gauge future price movements. This makes it the perfect market for traders that use technical tools. If you want to learn more about technical analysis from one of the world's most widely followed technical analysts, check out the  course on the I

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