How Currency Trading Works

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How Currency Trading Works

Trading in any financial market is very tough, as proven by the fact that the vast majority of new traders lose money. Success, on the other hand, may be found with enough of the correct education, practice, and experience. So, what exactly is currency trading, and is it suitable for you?

The currency market, often known as forex (FX), is the world’s biggest financial market, with more than $4-5 trillion in notional value moved daily. In contrast, the New York Stock Exchange has a daily volume of just $25 billion (NYSE).Although the market is huge, until recently, the majority of the volume came from professional traders; nevertheless, as currency trading platforms have improved, more retail traders have discovered forex to be suited for their investment objectives.

Key Takeaways

  • Forex exchanges enable currency pair trading 24 hours a day, seven days a week, making it the world’s biggest and most liquid asset market.
  • While it is the world’s biggest market, a very small number (20) of currency pairings account for the bulk of volume and activity.
  • Currencies are traded in pairs (for example, EUR/USD), with each pair being quoted in pips (% in points) to four decimal places.
  • Currency values change due to a variety of variables such as the economic status of the nations involved, geopolitical risk and instability, and trade and financial movements, among others.

Top 5 Questions About Currency Trading Answered

How Does Currency Trading Work?

Currency trading is a 24-hour market that is only closed from Friday evening to Sunday evening, but the trading periods are deceptive. The trading sessions are divided into three categories: European, Asian, and US.

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Despite some overlap in the sessions, the major currencies in each market are usually traded during those market hours. This implies that particular currency pairings will see more volume during certain sessions. Traders that stick to dollar-based pairings will see the greatest activity throughout the US trading day.

Forex Market Hours in GMT. ForexMarketHours.com

Pairs and Pips

Currency trading is always done in pairs. Unlike the stock market, where you may buy or sell a single stock, the forex market requires you to purchase one currency and sell another. Following that, practically all currencies are valued to the fourth decimal point. A pip, or percentage in point, is the smallest commerce increment. One pip is usually equivalent to 1/100 of 1%.

Currency is sold in different lot sizes. A micro-lot is 1,000 cash units. A micro lot equals $1,000 of your base currency, the dollar, if your account is financed in US dollars. A micro lot consists of 10,000 units of your base currency, whereas a normal lot consists of 100,000 units.

Apip (percentage in point) is the lowest trading increment. One pip is often equivalent to 1/100 of 1%, or the fourth decimal point. The majority of currencies are valued to the fourth or fifth decimal point. Currency pairings using the Japanese Yen (JPY) as the quote currency are an exception to this rule. These pairings are often priced to two or three decimal places, with the second decimal place representing a pip.

Because one pip in a micro lot indicates just a 10-cent price change, retail or novice traders often trade currencies in micro lots. This makes it simpler to control losses if a deal does not provide the desired outcomes. One pip in a micro lot equals $1, whereas one pip in a standard lot equals $10. Some currencies may change 100 pips or more in a single trading session, making potential losses far more bearable for the small investor by trading in micro or mini amounts.

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Far Fewer Products

When compared to the hundreds of equities accessible in global equity markets, the bulk of currency trading activity is restricted to just 18 currency pairings. Although additional currency pairings are traded in addition to the 18, the eight most often traded currencies are the US dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD), and Japanese yen (JPY).Although no one would claim that currency trading is simple, having fewer trading alternatives simplifies transaction and portfolio administration.

What Moves Currencies?

Because many of the dynamics that move the stock market also move the currency market, a growing number of stock traders are becoming interested in currency markets. One of the most important is supply and demand. When the globe need more dollars, the dollar’s value rises; when there are too many in circulation, the price falls.

Other variables that may impact currency values include interest rates, fresh economic statistics from the major nations, and geopolitical concerns.

Why Is Currency Trading Called Forex or FX?

Forex, or FX, is an acronym for “foreign exchange.” These are frequent abbreviations for currency trading.

Who Invented Currency Trading?

Foreign currency exchange dates back to early human civilisation and the development of trade routes and business. Modern forex trading, on the other hand, started in 1973, when the gold standard of foreign currency was abandoned and free-floating currencies were introduced.

How Are Currency Pairs Quoted?

Currencies are traded in pairs, thus in each transaction, one currency is swapped for another at a market-determined rate. EUR/USD = 1.08 is an example of one of these pairings. This implies that one Euro equals $1.08 USD. The base currency comes first, followed by the quote currency (or counter currency). The quote currency in a direct quotation is the foreign currency, but the quote currency in an indirect quote is the local currency.

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The Bottom Line

Learning about currency trading, like everything else in the investment market, is simple, but discovering effective trading tactics requires a lot of experience. Most forex brokers will let you establish a free virtual account and trade with virtual money until you uncover tactics that will help you become a successful forex trader.

Investopedia does not provide tax, investment, or financial advice. The material is offered without regard for any individual investor’s investing goals, risk tolerance, or financial circumstances, and may not be appropriate for all investors. Investing entails risk, including the possibility of losing money.

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