Currency trading is also commonly referred to as foreign exchange, Forex or simply FX. It is the worldwide decentralised financial market in the trading of international currencies. In simple terms, foreign exchange is merely about the exchanging of one currency to another.
Currency is traded for a number of purposes including; tourism, whereby people need to convert money in order to be able to pay for goods in local currency, international trade, where businesses also need to convert currency to pay for goods, businesses who trade internationally and seek to ‘hedge’ or limit their exposure to overseas currency fluctuations and by speculators or ‘traders’ seeking to profit.
Traders can profit from this market because any given currency has a value that is relative to other world currencies, and all these currencies are constantly fluctuating. Traders who buy or sell at the right time are able to take advantage of the shifts in the relative values of certain currencies and therefore make a profit. Just as a stock trader seeks to buy low and sell high, or vice versa, currency traders seek to do the same with currency.
As mentioned above, there are many reasons why currency is traded. The fluctuations in the relative value in currency are a product of these forces of tourism, international trade and speculation. The fluctuations are a reflection of economies strengthening or weakening in relation to each other.
As speculation in currency has grown, the impact of speculators on currency pricing has become a lot more significant. The sometimes wild fluctuations in the pricing of a currency pair before and after an important announcement is testament to that. This makes for an interesting trading environment where at least in the short term; the fundamentals of a country are often not truly reflected in their currency pricing.
Forex trading is the largest market in the world, exceeding all other equity markets in the world combined, and dwarfs the perhaps better-known trade in stocks and shares.
Currency trading has many advantages over stock trading, including:
- The higher leverage allowed (50-1 and 100-1 are not uncommon) as compared to blue chip stocks (2-1 or 3-1 generally offered).
- More hours to trade, allowing you more flexibility in the hours you trade, or more hours for automated systems to be making profit. Generally the stock markets (excluding futures) only open for around 7 hours a day, compared to close to 24 hour operation during the working week for forex.
- Less slippage due to higher volumes being traded
- Lower trading fees
