The foreign exchange market alias forex or FX market is a global, online over-the-counter (OTC) market where currencies of about 170 countries are bought and sold. It is open 24 hours a day. It is the biggest financial market in the world and has very high liquidity.

The forex market participants include businesses, banks, speculators, institutions, etc. Most of the trading is from banks, businesses & institutional investors. Some of the trades in the forex market are speculative in nature and a part of them is from retail traders. Retail traders come to the forex market to speculate, hedge against currency and interest rate risk, etc.

Trading forex is done through a forex broker. The broker is a specialized company that creates the perfect environment for traders to take advantage of the currency fluctuations in no time. Opening an account with a forex broker will allow you to trade on the international forex markets using your funds as margin collateral, allowing you to place larger trades. How is that possible? Through leverage.

Forex brokers offer leverage in order to allow their clients to trade high amounts of money. A broker that gives you a leverage of 1:200 allows you to trade 200 dollars for every dollar you have on your account. If you make a deposit of 100 USD you are able to trade worth of 20,000 USD because of the leverage effect.

Why is the broker allowing this? Because he knows currency markets move very slow, and in order to be able to make significant profits in short intervals of time you need to trade with lots of money.

Here is another example to explain why the broker gives you leverage. Let's consider the currency pair EUR/USD, the most traded currency pair in the world. At the time of writing this article, the rate for EUR/USD is 1.0631 which means that one Euro costs 1.0631 US Dollars. In order to buy 10,000 Euros you need to pay 10,631 US Dollars. Let's say a trader buys 10,000 Euros through his forex broker at the above mentioned rate, and two days later sells them at 1.0731 (a difference of 100 pips which means a movement of only 0.9% which happens frequently in a two days period).

Our trader would make a profit of exactly 100 USD with this trade (notice that for the EUR/USD currency pair, one pip equals one dollar when trading 10,000 - the 'pip' is the fourth decimal of the rate). Since he made a profit of $100 in two days the broker knows that his risk is also limited in a two days period, and even if he loses he can't lose too much. If the trade would have gone the wrong way in the same amount, he would lose $100 only.