Currency trading is the act of buying and selling of different currencies of the world. It is also commonly referred to as Foreign Exchange or Forex trading. The currency or forex market allows investors to trade currency in volume. The currency market is one of the largest and the most liquid market around the world, trading around roughly $4 trillion each day. It is a 24 hours a day, 5 ½ days a week market operating globally.
How It Works
As mentioned earlier, the basic idea of currency trading is using a currency to buy another. Therefore, the currencies will always be quoted in pairs using a three-letter code like EUR/USD (euro to U.S. dollar) or GBP/JPY (British pound to Japanese yen).
The first listed currency is the "base" currency, and the second one is referred to as the "counter" or "quote" currency. When you are buying, the quoted price tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. For example, if you see EUR/USD = 1.4920, it means 1.4920 U.S. dollars will buy 1 euro.
Currencies are quoted out t four decimal points, unlike stocks that have only two decimal points. In currency trading, all currency quotes are in a unit known as a “pip”.
Who Trades Currencies?
Currencies are traded by individual retail investors, corporations and financial institutions. Individual retail investors and banks are trading to make profits and corporations usually trade in the normal course of the international business process.
What You Should Know as a Beginner
Whether it’s a bank, a company, or you trading the currency, being educated in the currency market is crucial for successful trading. Currency value changes over time and any time, mostly due to the changes that occur in political leadership, economic rise and falls, and even natural disasters.
Making money in currency trading is not impossible, however, it is challenging. Advisable practices include:
- Begin trading with a practice account
- Diversify risk by making several mall trades in different markets rather than a single trade.
- Use stop loss orders to limit potential losses
Someone successful in trading currency is one who learns as much as he or she can about the currency market before ever starting to trade, and continues to study and learn about this ever-changing market.