What is Currency (Forex) Trading?

What is Currency (Forex) Trading?

Currency market is the largest financial market where $5 Billion worth of transactions are processed every day. Learn more about the currency market and the benefits of currency trading.

In a traditional sense, currency trading is the act of buying and selling currencies physically. However, the term has a narrower and more focused sense when it comes to online trading as a concept. Also known as foreign exchange, online currency trading means managing long or short positions in the foreign exchange market for profit. 

It is a 24h open market, encompassing Europe, Asia and United States markets yet remaining decentralized at the same time. Currency pairs are traded in lots, which are standardized units of measure.

Value of a lot depends on your base currency. A standard lot is 100,000 units of your base currency. If you are trading 1 lot of EURUSD, you are dealing with €100,000. 

You might be wondering if everyone would easily invest that much into trading. That is where ‘margin trading’ comes into effect. But we will talk about it later.

How did currency trading start?

The foundations of today’s foreign exchange market were laid in the mid-70s when currency brokers saw a significant demand from small and medium banks for a steady flow of exchange rates regarding major currencies. 

To synchronize the prices, the foreign exchange brokers installed direct lines to all the banks willing to participate. In fact, the nickname for EURUSD, ‘the Cable’, actually refers to such a direct line from New York to London. Usually, a major bank declared a rate and the brokers showed it to other banks at the same time. The first bank to take the deal completed a transaction. The others had to wait for the next rate. However, each bank was free to claim the transaction, in other words anyone could show a bid or an offer. 

Later, technology evolved and the brokers found more sophisticated and more efficient methods of establishing two-way price feeds. Thus, the banks became their primary liquidity providers. Eventually, the number of available currency pairs increased and new products became available in the form of CFDs. 

People trade currencies all the time, but how can currency be an investment?

Let’s say you travelled from Europe to Japan. For the trip, you exchanged your euros into Japanese Yen. After enjoying a ton of sushi, soba and sake, it’s time to go back. You meant to exchange your extra yens back to euros. But you forgot that 5,000 yens in your pocket.

When you first made the exchange, 1 Euro was 130 Yens. You had paid €38,5 for 5,000 Yens. Then you found it in your pocket one month later. And now, 1 Euro is 110 Yens. You made €7 without doing anything.

Now imagine if you actually tried to do something… If you kept an eye on the financial markets, followed global news and politics, viewed economic indicators and fundamental analysis for currencies, you could invest in a currency and profit!

And if you are CFD trader, you could potentially profit from both the rising or the falling prices! 

We will continue our initiation with the next article.

This post is also available in: Español

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