Understanding the basics of forex. This is a brief forex 101 defining what is forex.
The foreign exchange market (forex) allows investors to trade two currencies against each other. Forex rates are what it costs to exchange one country’s currency for another country’s currency.
Trading forex is essentially pairs trading: You’re buying one currency and selling another. Let’s look at the U.S dollar versus the Canadian dollar (USD/CAD) as an example. If USD/CAD is trading at 1.37, that means $1 USD is equal to $1.37 CAD. The easiest way to understand the quote of any currency pair is to read the pair from left to right.
The forex market is a dynamic, global market open virtually around the clock. And because foreign exchange rates are based on global interest rates as well as macroeconomic and geopolitical conditions, they’re always fluctuating.
The bulk of foreign exchange rate trading takes place on what’s called the interbank market, which is an over-the-counter (OTC) market that is not traded on an exchange. The interbank market consists of a web of banks, dealers, intermediary brokers, and retail traders.
If you’re a sophisticated investor looking for international exposure and see long-term or short-term opportunities in cross-border interest rate differentials, the foreign exchange market may be worth a look.
To learn more about forex, visit the TD Ameritrade forex page.
Also, watch the video below to learn more about forex trading.
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Trading forex involves speculation, and the risk of loss can be substantial. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Forex investments are subject to counter-party risk, as there is no central clearing organization for these transactions. Before considering the trading of this product, please read the Forex Risk Disclosure. A forex dealer can be compensated via commission and/or spread on forex trades. TD Ameritrade is subsequently compensated by the forex dealer. Forex accounts are not protected by the Securities Investor Protection Corporation (SIPC). Diversification does not eliminate the risk of experiencing investment losses.
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