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.
Forex trading is something like trading in stocks. Professional stock traders will tend to buy and sell stocks in a very short time, taking advantage of small fluctuations in price rather than buying and holding stocks as the average personal investor would do.
How Does Currency Trading Work?
In order to illustrate how currency trading can make money for investors, let's take a look at an example.
Let's say the current rate on the British pound to euro forex market is this: GBP/EUR 1.1200. That means that to buy one British pound you will need 1.12 euros. If you believed that the value of the euro was going to rise compared to the value of the pound, you might sell 100,000 pounds, buy 100,000 euros, and wait. Then let's say a few days later, the exchange rate has moved to: GBP/EUR 1.0600. Sure enough, the pound is now worth only 1.06 euros. Now if you sell your euros and buy back 100,000 pounds, you will have made a profit of 6% of your investment, less any fees.
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 is called trading margins. On a $100,000 trade the margin is usually 1% or 2%, i.e. $1,000 or $2,000. This is the money that you must have in your forex brokerage account.
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.
More and more ordinary people are getting into currency trading these days. It has certain advantages over the stock market and even if you know nothing about valuation of the different currencies you can set up a forex robot, a complex software program that will trade for you according to the settings you choose. Keep in mind that it is a risky business and money can be lost as well as gained. Knowing what is currency trading gives you an idea of whether you want to take the next step towards becoming a currency trader. - 15224
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.
Forex trading is something like trading in stocks. Professional stock traders will tend to buy and sell stocks in a very short time, taking advantage of small fluctuations in price rather than buying and holding stocks as the average personal investor would do.
How Does Currency Trading Work?
In order to illustrate how currency trading can make money for investors, let's take a look at an example.
Let's say the current rate on the British pound to euro forex market is this: GBP/EUR 1.1200. That means that to buy one British pound you will need 1.12 euros. If you believed that the value of the euro was going to rise compared to the value of the pound, you might sell 100,000 pounds, buy 100,000 euros, and wait. Then let's say a few days later, the exchange rate has moved to: GBP/EUR 1.0600. Sure enough, the pound is now worth only 1.06 euros. Now if you sell your euros and buy back 100,000 pounds, you will have made a profit of 6% of your investment, less any fees.
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 is called trading margins. On a $100,000 trade the margin is usually 1% or 2%, i.e. $1,000 or $2,000. This is the money that you must have in your forex brokerage account.
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.
More and more ordinary people are getting into currency trading these days. It has certain advantages over the stock market and even if you know nothing about valuation of the different currencies you can set up a forex robot, a complex software program that will trade for you according to the settings you choose. Keep in mind that it is a risky business and money can be lost as well as gained. Knowing what is currency trading gives you an idea of whether you want to take the next step towards becoming a currency trader. - 15224
About the Author:
About the author: Jack Sawyer can help you locate the best Forex Software. For more information on Forex Trading Online go to http://www.forex-product-review.com.
