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Introduction to Currency Trading

By Edited Feb 16, 2014 0 0
Currency trading or foreign exchange trading refers to the buying and selling of different currencies against one another. It is commonly called forex, or FX for short. Forex is considered to be the largest and m
Introduction to Currency Trading
ost liquid trading market in the investment arena, amounting to $3 trillion in trade volume daily. Forex trading is conducted by the interbank market, meaning it is an over-the-counter market; there is no specific location where buyers and sellers exchange their currencies. You can trade currency in banks, government institutions, private institutions, and even in the comfort of your own home through phone, email, and online, with foreign exchange brokers. What's great about forex is it is a 24 hour market so you can trade currencies any time of the day or night. The main hubs for trading are London, Sydney, Tokyo, Frankfurt and New York.

There are different markets in forex such as the spot market, forward market, and futures market. The spot market trades on the current values of currencies. In the forward market the traders agree on a specific exchange rate and the transaction date for the trade. It will disregard whatever exchange rate might be on the specific transaction date. In the futures market, buyers and sellers trade on future contracts, which are contracts to buy a specific commodity or financial instrument at a specified price with the delivery set in the future.

In forex, currencies are assigned a three-letter code: US dollar is USD, euro is EUR and Japanese yen is JPY. The currency rates are composed of 6 letter words and as a tradition it is the more expensive currency that appears first. So USDJPY is the amount of Japanese yen per US dollar, and USDJPY = 89.82 means that 89.82 Japanese yen is equivalent to 1 US dollar.

So how can you make money on the foreign exchange market? Consider this scenario. In every currency exchange there is a chart which shows the bid price and ask price. For example, suppose the USDJPY has a bid price of 89, which means that you can sell your 1 US dollar for 89 Japanese yen, and an ask price of 90, which means that you can buy 1 US dollar for 90 Japanese yen. Now let's say you bought 1,000 USD, which will cost you 90,000 yen. Later on the bid price of USDJPY becomes 93 and its ask price becomes 94, so you sell your 1,000 USD and get 93,000 Japanese yen, thus giving you a total earnings of 3,000 Japanese yen.

Of course you could earn a lot if you become good with speculating the ups and downs of the exchange rates of your currencies, so learn all you can and if possible, experiment with a demo account before you begin trading.



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