What is currency trading? Essentially, it is exchanging a given currency for another one. We all do this when we visit foreign countries ? you trade some of your money for the local currency so that you can purchase products and services in the country you are visiting.
However, when people talk about forex (foreign exchange) trading or currency trading on the forex market, they generally mean something very different. In this case traders are constantly exchanging one currency for another (buying currencies and selling others) with the aim of making a profit when the exchange rates change.
It is a little like trading in stocks on the stock market. Stock traders usually buy and sell stocks very quickly compared with the average personal investor who will take the advice of a broker but often keep stocks for years or even decades.
How Does Currency Trading Work?
The best way to demonstrate how currency trading makes money for the traders is to use an example.
Let's say that on the Forex market right now, the exchange rate between the Euro and the British Pound is as follows GBP/EUR 1.12. This tells us that for each pound you want to buy, you'll have to spend 1.12 euros. Now suppose that you think that the value of the euro will rise against the pound. You then sell 100,000 pounds and buy 100,000 euros. After a few days, the rate stands at GBP/EUR 1.06. You were right ? the pound has dropped to 1.06 euros. You can now sell these euros and buy pounds again ? and you will have made a 6% profit on the deal.
Now, this is more money than most of us can afford to trade with - if you have a spare 100,000 Pounds or Euros just sitting around, you probably don't need the money anyway. However, you don't have to actually have this money to get involved ? you just need enough money to cover any losses that may be incurred in case your prediction was wrong; the rest of the money is put up by the brokerage.
This amount of money which you must have in your Forex brokerage account is called your trading margin, which tends to be 1%-2%. On a $100,000 trade, this is between $1,000 and $2,000.
The amount you trade is determined by 'lots'. A lot may be worth $10,000 or more depending on the currency and the broker. So if you want to trade $20,000 you would trade 2 lots and so on.
There are also limited risk accounts available ? with these accounts, you can lose only what you have in your Forex brokerage account. These accounts can prevent margin calls and allow small investors to trade in mini-lots (these are fractions of a lot) on the Forex market. You can trade, for example $1,000 or .1 lot. While this keeps risk down, these trades cost more to make.
An increasing number of private investors are becoming involved in currency trading. It can be more profitable than the stock market; even if you know very little about the global currency exchange, you can use a Forex robot. This is software which can trade for you based on user-defined settings. As with any kind of investment, there is risk involved and you can lose money as well as gain it. Knowing what is currency trading can help you decide whether it is an investment venue you want to become involved in.
However, when people talk about forex (foreign exchange) trading or currency trading on the forex market, they generally mean something very different. In this case traders are constantly exchanging one currency for another (buying currencies and selling others) with the aim of making a profit when the exchange rates change.
It is a little like trading in stocks on the stock market. Stock traders usually buy and sell stocks very quickly compared with the average personal investor who will take the advice of a broker but often keep stocks for years or even decades.
How Does Currency Trading Work?
The best way to demonstrate how currency trading makes money for the traders is to use an example.
Let's say that on the Forex market right now, the exchange rate between the Euro and the British Pound is as follows GBP/EUR 1.12. This tells us that for each pound you want to buy, you'll have to spend 1.12 euros. Now suppose that you think that the value of the euro will rise against the pound. You then sell 100,000 pounds and buy 100,000 euros. After a few days, the rate stands at GBP/EUR 1.06. You were right ? the pound has dropped to 1.06 euros. You can now sell these euros and buy pounds again ? and you will have made a 6% profit on the deal.
Now, this is more money than most of us can afford to trade with - if you have a spare 100,000 Pounds or Euros just sitting around, you probably don't need the money anyway. However, you don't have to actually have this money to get involved ? you just need enough money to cover any losses that may be incurred in case your prediction was wrong; the rest of the money is put up by the brokerage.
This amount of money which you must have in your Forex brokerage account is called your trading margin, which tends to be 1%-2%. On a $100,000 trade, this is between $1,000 and $2,000.
The amount you trade is determined by 'lots'. A lot may be worth $10,000 or more depending on the currency and the broker. So if you want to trade $20,000 you would trade 2 lots and so on.
There are also limited risk accounts available ? with these accounts, you can lose only what you have in your Forex brokerage account. These accounts can prevent margin calls and allow small investors to trade in mini-lots (these are fractions of a lot) on the Forex market. You can trade, for example $1,000 or .1 lot. While this keeps risk down, these trades cost more to make.
An increasing number of private investors are becoming involved in currency trading. It can be more profitable than the stock market; even if you know very little about the global currency exchange, you can use a Forex robot. This is software which can trade for you based on user-defined settings. As with any kind of investment, there is risk involved and you can lose money as well as gain it. Knowing what is currency trading can help you decide whether it is an investment venue you want to become involved in.
About the Author:
About the author: Jack Sawyer has some great advice on finding the best Forex Software. For more information on Forex Trading Online go to http://www.forex-product-review.com.
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