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Foreign exchange is the act of changing one country’s currency into another’s for tourism, commerce or other reasons. As businesses continue to expand to markets all over the globe, the need to complete transactions in other countries’ currencies is only going to grow.

Fluctuations in currency value expose businesses to risk when they have to buy goods or services beyond their borders. Forex markets provide a way to hedge that risk by fixing a rate at which the transaction can be completed in the future. Investors can also buy or sell one currency against another in the hopes that currency will gain or drop in strength and result in a profit. That’s called speculating.

The interbank market includes banks from around the world that trade among each other. Supply and demand sets the prices in the market. Since between $2 trillion and $3 trillion in various currencies trade every day, no single central bank can move the market for any length of time without the help of other central banks.

The pros of forex trading include the ease of entering and exiting trades in most major currencies; traders can use leverage to control large positions with little of their own money; forex markets are open around the clock; and since it’s a macroeconomic endeavor, trading currencies does not require understanding the nuances of microeconomic factors.

Traders should view forex trading as a chance to diversify. They can approach it as an active trader’s opportunity to earn more spread, or as leveraged trading where it’s easier to work with a small amount of money than what’s needed in the stock market.

Forex traders should know how to time their trades with charts, and they should avoid impulsive behavior through the use of common sense.

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