how forex differs from other markets
there are some major differences between the way the forex operates and other markets such as the u s stock market this means investors aren t held to as strict standards or regulations as those in the stock futures or options markets there are no clearinghouses and no central bodies that oversee the entire forex market you can short sell at any time because in forex you aren t ever actually shorting if you sell one currency you are buying another since the market is unregulated fees and commissions vary widely among brokers most forex brokers make money by marking up the spread on currency pairs others make money by charging a commission which fluctuates based on the amount of currency traded some brokers use both there s no cut off as to when you can and cannot trade because the market is open 24 hours a day you can trade at any time of day the exception is weekends or when no global financial center is open due to a holiday the forex market allows for leverage up to 1 50 in the u s and even higher in some parts of the world that means a trader can open an account for 1 000 and buy or sell as much as 50 000 in currency leverage is a double edged sword it magnifies both profits and losses 5example of forex transactionsassume a trader believes that the eur will appreciate against the usd another way of thinking of it is that the usd will fall relative to the eur the trader buys the eur usd at 1 2500 and purchases 5 000 worth of currency later that day the price has increased to 1 2550 the trader is up 25 5000 0 0050 if the price dropped to 1 2430 the trader would be losing 35 5000 0 0070 currency prices move constantly so the trader may decide to hold the position overnight the broker will roll over the position resulting in a credit or debit based on the interest rate differential between the eurozone and the u s if the eurozone has an interest rate of 4 and the u s has an interest rate of 3 the trader owns the higher interest rate currency in this example therefore at rollover the trader should receive a small credit if the eur interest rate was lower than the usd rate the trader would be debited at rollover rollover can affect a trading decision especially if the trade can be held for the long term large differences in interest rates can result in significant credits or debits each day which can greatly enhance or erode profits or increase or reduce losses of the trade most brokers provide leverage many u s brokers leverage up to 1 50 let s assume our trader uses 1 10 leverage on this transaction if using 10 1 leverage the trader is not required to have 5 000 in an account even while trading 5 000 worth of currency only 500 is needed in this example a profit of 25 can be made quite quickly considering the trader only needs 500 or 250 of trading capital or even less if using more leverage that shows the power of leverage the flip side is that the trader could lose the capital just as quickly 