Currency Trading

Currency trading boils down to buying and selling currencies at the foreign exchange while trying to benefit from the difference in the buy/ sell rate. Currency trading comes with a number of benefits over equity trading. First, the spreads are very low, making the costs low as well. Second, the currency market’s volatility is quite high, and traders have the opportunity to generate huge return from trading. The volatility to spread ratio stands at about 500:1 at the foreign exchange market in comparison to 100: 1 for stocks, which is the ideal case.

How does FOREX work?

To explain the basic principles through which FOREX functions, we should first introduce and elaborate on the notion of currency exchange rate which is the gist of currency trading. In a nutshell, currency exchange rate represents the value of one currency against another i.e. EUR against USD, JPY/USD, EUR/GBP, etc. Here it should be noted that while some pairs trade one for one (one EUR trades for slightly over one USD) some pairs like USD/JPY trade at about 82 Japanese yen for one US dollar. This is so because not all currencies are equally strong. Due to the fact that global markets are seldom stable, currency exchange rates are in a state of
constant fluctuation. This is explainable with the impact of different economic factors such as, for instance, the annual inflation rate, GDP growth or decline, industrial output, and political events in the countries whose currencies are traded at the foreign exchange. Big players on the foreign exchange take these factors into consideration upon deciding which currency pair they should buy or sell. In other words, foreign exchange profiteers profit on the imbalances on the foreign exchange created by the abovementioned factors.

To get a better idea of the process, here is a brief example of a foreign exchange trade. The EUR/USD rate stands for the number of US dollars that one Euro can buy. Those who believe that the US dollar will grow stronger against the common European currency will buy dollars with Euros. They will be hoping to sell them back at a more profitable rate and make more Euros in the end.

Forex is said to be the market that never sleeps. Millions, if not billions, of people around the globe want to make easy money on the foreign exchange marker. They seek to benefit from the differences in the exchange rates of different currencies, and it is hardly a wonder that Forex is the largest market in the world. It has a daily turnover of over three trillion US dollars. Those who came up with the brilliant saying that money makes the world go round, must have had precisely Forex in mind. This market is always crowded and lively, and trade is going on twenty-four hours a day, seven days a week. But it is also true that currency trading is one of the riskiest financial endeavors one can undertake. It is the investment choice of experienced tycoons who have a wide experience in trading and considerable financial resources to invest. As always, big players get the largest share of profits.