The currency market is commonly known as the Forex (Foreign Exchange) market. Although it is called a market, it has no physical or even virtual location: on the contrary, it is the largest of the unregulated markets, the so-called OTC (Over The Counter) markets. It is a market where a continuous exchange between different currencies takes place. Forex is active five days a week, 24 hours a day. Thanks to the internet and online brokers, access to the Forex market - although risky - has become much easier thanks to the widespread presence of online brokers and trading platforms. As many experts and various authorities write, this is a market that is and should be left to the professionals due to the risks and complexities involved.
Forex trading is based on pairs of currencies, the first called the 'base' and the second called the 'quote'. The aim of those who invest in this market is to profit from changes in exchange rates (the value of the quote currency is equal to the unit value of the base currency). Exchange rates fluctuate constantly and are influenced by a wide range of factors: from monetary policy to the economy, from inflation to international political risks, and so on. Currencies are usually identified by three letters. Examples: US Dollar (USD), Euro (EUR), British Pound (GBP), Japanese Yen (JPY), Yuan (CNY), Swiss Franc (CHF) and so on.
Those who invest in Forex, the global currency market, as mentioned above, expect to make money by taking advantage of fluctuations in exchange rates between different currency pairs. Profits - which depend on correctly predicting the direction of the value of currency pairs - are generated by the difference between the buying and selling prices of the currencies.
In addition to the above-mentioned volatility of exchange rates, one of the aspects that makes Forex very risky is the use of leverage, which makes it possible to obtain a large position with a relatively small investment. Leverage increases the potential for profit and loss. The other investment strategy that is particularly popular in the market is currency trading. The most common forms include day trading, position trading, algorithmic trading and trading based on economic news.
Let's return for a moment to the use of leverage in the Forex market: in financial jargon, leverage allows you to have a larger investment position than your available capital. For example, if you use a leverage of 200:1, by investing one thousand Euros you can trade as if you had an investment position of 200 thousand Euros. If the price movement is in line with the investor's prediction, this is the profit that would have been made had 200,000 been invested rather than 1,000. Similarly, if the forecast turns out to be wrong, the loss would be the equivalent of investing 200,000 euros instead of 1,000 euros. The risk is obvious: losses can far exceed the capital available.
From what has been said so far, it is clear that the Forex market is risky. In this respect, it is well known that research carried out by the Autorité des marchés financiers (AMF) found that almost 90% of investors in CFDs and Forex lost money. The Securities and Exchange Commission (SEC), in its financial education page on the subject, not only mentions these and other risks associated with Forex, but specifically advises savers and small investors to seek the advice of a financial advisor before embarking on any Forex investment. The risks mentioned by the SEC include fraud (it is very important to use authorised and reputable brokers) and hidden costs on the part of some traders.
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