You’re heading to Australia for two week’s holiday. Along with your swimmers and sunscreen, chances are you also brought along some cash to exchange into Australian Dollars upon arrival. You stop at the currency exchange window, hand over £500, and get back $1,000. But then you end up using your charge card for all the Fosters, Rugby League games, and other Aussie treats—you still have the $1,000 at the end of the week. You decide that you might as well exchange those dollars back into pounds before heading home, and you fully expect to receive your £500 back. But you don’t! The man at the window hands you back £600. Why?
Well, it seems that during the time you were enjoying the beach in Australia, the exchange rate between the British Pound and the Aussie Dollar changed. When you arrived, the rate for the GBP/AUD was 0.5000, or $1,000 was equal to £500. By the time you left, the British Pound had decreased in value and the Australian Dollar had increased. The rate was 0.6000, or $1000 was equal to £600. So the weakened GBP caused you to gain £100 in the exchange. On the other hand, this same move would have meant a loss for your Australian counterpart who was traveling—and exchanging money—in the opposite direction.
In its simplest form, this is what foreign exchange trading, or Forex, is all about.
Next page - What is Forex?
Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose.
There is considerable exposure to risk in any off-exchange foreign exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair.
Forex trading is leveraged, meaning that a small price movement in your favour can result in a high return on the deposit requirement placed for the bet, but a small price movement against you may result in substantial losses. This could result in being required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses. To manage exposure, employ risk-reducing strategies such as ‘stop-loss’ or ‘limit’ orders. It is important to note that when trading, increasing your leverage will increase your risk. Additionally, contingent orders are not guaranteed and will not always necessarily minimise your risk.
Any opinions, news, research, analysis, prices, or other information contained in this book are provided as general market commentary, and do not constitute investment advice. FOREX.com is not liable for any loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. FOREX.com has taken reasonable measures to ensure the accuracy of the information in this book.
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