What Is Currency Trading?
Currency trading is a kind of commodities exchange much like stock or futures markets only the trading occurs between the values of different currencies. Since one country’s currency is always a different value relative to another currency, the difference that exists becomes a trade-worthy commodity.
Online Forex Currency Trading Basics for Dummies
Despite the fact that it is a volatile market (with high possibility of financial loss) currency trading is the largest financial market on the planet. Depending on whose estimate you believe, there is about $2 trillion traded in the currency market every day. We think of the New York Stock Exchange as a large financial market, but when compared to the currency market, the $50 billion traded on Wall Street seems like pocket change. The currency market is simply enormous, partially because it involves traders from all over the world and partially because its only commodity is cash.
The currency market is commonly referred to as “foreign exchange”, FOREX, or just FX. You’ll see all three names in use in different settings.
All currency has a value that changes relative to the world’s other currencies, and traders on the foreign exchange market buy and sell large chunks of currency to make “leverage” against the ups and downs in that relative value — the goal is to buy one currency when its value is low and sell it again when that value reaches a profitable level. Yep, the old “buy low sell high” principle is at work again.
Why Does Currency Change Value?
Two main reasons — the most common reason is international commerce. When people from one country want to invest or purchase an item or product from another country, their money’s value must be weighed against the value of currency in the market in which they’re shopping. The same process works in reverse — when money leaves or enters a country, that money’s value must be known before it can be converted for commercial use. Basically — when money changes hands or crosses borders, its value must be known.
The second reason for the change in currency’s value turns out to be the foreign exchange market itself. The forces of “speculation” in the currency market actually affect the currency being traded.
It happens like this — an investor makes a speculation about the value of a given currency based on current events or some other inside information. That investor then either purchases sells a currency based on that notion. On a small scale, these kinds of decisions don’t have much impact, but when a speculation turns into a trend, it can have major consequences on given currency, and even on a country’s economy in the big picture.
For example, a financial crisis in Asia in 1997 was seen as a chance for investors to turn global economic downturn into profit. Financial market speculators used FOREX to buy currency low and sell high. This had a negative impact in the long run, as most economists credit the financial market with extending the downward financial trend in East Asia that year.
Why Currency Trading?
There are plenty of benefits to currency trading when considered against any kind of market equity trading. Because the “spreads” between different currencies are low, an investor can make a low initial investment. Besides low cost, there is the chance for making huge amounts of cash in very little time. Returns as high as 500 : 1 are often reported by members of the FOREX community, as compared to similar high boasts of ratios like 100 : 1 on the NYSE. If you can come up with a currency trading system that works, then you can make some money. But…
This last feature — high potential gain — is cut by a serious chance of loss. Amateur investors or people who don’t understand the financial market, stand a good chance of losing their shirt. Remember that gambles for big gain often mean gambles for big loss.
For more information related to currency trading and investing, see the following pages:
- The Forex Currency Market
- What Is Forex Trading?
- Why Trade Forex?
- Forex Trading Software
- Best Forex Software
- Day Trade Forex
- Automated Forex Trading
- Free Forex Trading
- Forex Currency Market
- Forex Brokers