Currency Trading

Currency trading is more commonly known as foreign exchange or Forex

. As the name suggests, it is the practice of converting one currency to another. The current exchange rate is the rate at which a currency can be exchanged for another currency. These exchange rates constantly fluctuate due to a number of several economic factors, including geopolitical events, industrial production and inflation. It is currency trading which makes the existence of the foreign exchange market possible and fuels international trade and investment. Currency trading is considered the largest market in the world since its market allows the countless daily, 24-hour transactions all over the globe, with an estimated $3.2 trillion in worth.

Currency trading is possible because of the different but related values of currency. Currency all over the world has a value relative to the other currency. It is currency trading which utilizes the buying and selling of large quantities of currency to leverage the changes in relative value into profit. For instance, the Euro/US dollar rate indicates the number of US dollars one Euro can buy. If a trader believes that the Euro will increase in value against the US dollar, he or she will buy the former with the latter. When the exchange rate rises, the trader can sell the Euros back and make a profit out of the sale.

The currency trading market is remarkably different from other markets. For example, the trading of futures, options and stocks occur in a regulated exchange. On the contrary, currency trading does not happen on a regulated exchange. Currency trading is also not governed by a central body; there are no clearing houses to safeguard the trades and no arbitration committee to settle disputes. All currency traders transact with one another based on credit agreements.

In the past, currency trading has been a practice limited to huge investors. Banking chains and multinational corporations used to dominate the currency trading market place. However, small investors slowly penetrated the market. In fact, individual investors can have higher returns and lower risk when it comes to currency trading. Currency trading has a lot of advantages over equity trading such as the stock exchange. Unlike in the stock exchange, the spreads for currency trading are severely low; this means that the cost to a trader is also low. On the other hand, the unpredictability of the currency market is very high; this means that a trader can get a generous amount due to a given exchange. However, currency trading is not for everyone. Trading foreign exchange on margin maintains a high level of risk, so the trader should not invest money that he or she cannot lose.

Currency Trading

By: AlexK

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