What is Currency Trading?

Currency Trading

Currency trading, often referred to as foreign exchange or Forex, is the purchasing and selling of currencies in the foreign exchange marketplace, done to make profits. It is referred to as 'speculative Forex trading.' Forex trading is the largest market in the world, with nearly $2 trillion traded daily, with quick growth projections. The main factor that differentiates currency trading from other types of trading is its liquidity.

How Does the Forex Work?

Currency trading is usually done through brokers and market makers. Investors who trade this way depend on the brokers to place a corresponding trade on the international market. For example, the currency exchange of US dollars to Jamaican dollars is US$1 = JA$114.59, so US$2,000 can earn the investor JA$229,180, who can then in turn reinvest.

Forex trading occurs when the buying and selling of one currency for another takes place at the same time. Together, the two currencies form a currency pair. Each one is represented by three letters, with the first two letters representing the name of the country, and the third letter representing the name of the currency, as shown below:

United States Dollar: USD

Eastern Caribbean Dollar: ECD

Australian Dollar: AUD

Japanese Yen: JPY

The Language of Currency

When writing currency pairs, the market uses the following format: EUR/USD = 1.23700, rather than expressing them this way: EUR$1 = USD$1.23700. In the preferred format, the base currency is shown on the left, the Euro in this case, and the quote currency is shown on the right, which is the US dollar.

When investors are selling, the exchange rate of the foreign currency tells them how many units of the quote currency they will get for one unit of the base currency. Traders make decisions to buy if they think that the value of the base currency might increase. In the example, traders would purchase the US dollar with the Euro if they expect the value of the US dollar to increase to $1.31. The change that takes place is how the investor makes a profit.

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