Currency Trading

Currency trading is buying and selling currency on the Forex market. Traders do this so that they can make money from those transactions. These transactions involve two different sets of currencies, which is why they are often known as “pairs”.There are 7 pairs in currency trading that are most commonly traded. These include the four major pairs: euro/dollar (EUR/USD), dollar/Japanese yen (USD/JPY), British pound/dollar (GBP/USD), and dollar/Swiss franc (USD/CHF). The other three are the commodity pairs: Australian dollar/dollar (AUD/USD), dollar/Canadian dollar (USD/CAD), and New Zealand dollar/dollar (NZD/USD).These pairs, along with the various combinations that can be created from these pairs (such as GBP/CAD, AUD/NZD, EUR/JPY, etc.) make up over 95% of the currency trading in the Forex market. This makes the Forex market much more concentrated than the stock market, where thousands of company stocks are traded on a daily basis.Other differences between currency trading and stock trading include the fact that there are no brokers on the Forex market. As a result, there are no commissions. Dealers on the market assume the market risk by being counterparty to the investor’s trade. This means that the trader will make all of the profit that he/she can make, but it also means that the trader cannot buy on the bid price or sell at the offer price like one can on the stock market.A common term heard on the Forex market is the “pip”. A pip means “percentage in point” and is the smallest increment of trade on the market. It is represented by the fourth decimal point. For example, if you buy a box of cereal for $2.00, it would be represented on the market as “$2.0000″. The one exception to this rule is the Japanese yen. This is because the yen was never revalued after World War II. The approximate value of one yen today is equivalent to $0.01. Therefore, when the USD/JPY pair is used, it is only taken out to two decimal points. So in our example above, the box of cereal would still be represented by “$2.00″.Another main idea that a trader must understand when trading on the market is the idea of being “long” in one currency and being “short” in another currency. When a trader trades one standard lot (equivalent to 100,000 units) of a currency, say yen, for United States dollars, the trader is said to be “short” yen and “long” dollars. He/She has gained the dollars, but has lost the yen, so being “long” in one currency means having more of it, while being “short” in another currency means having less of it.One other important concept when it comes to trading on the Forex market is the idea of the “carry.” The carry is the most popular trade on the market and involves a trader going long on a currency with a high interest rate and financing that transaction with a currency that has a low interest rate. The idea behind this is for the trader to make a large amount of money from the disparity in interest rates and the fact that the trader is gaining more of the currency that has the higher interest rate.While it’s certainly possible for knowledgeable traders to make money in this way on the Forex market, the trader must be aware that the carry trade can quickly reverse itself (via a shifting in the interest rates of the prospective countries). This can lead to rapid and devastating losses to the investor so there is a good deal of risk in this as well.Currency trading involves trading two currencies on the market. Knowledgeable traders who know how the Forex market works can make substantial money from these transactions, but unaware investors can also lose considerable money due to the fluctuations of interest rates between the respective currencies. With virtually unlimited hours of operation (5 P.M. EST Sunday to 4 P.M. EST Friday) and its sheer size (nearly $2 trillion U.S. dollars traded every day) and scope (across Europe, Asia, and North America), trading currencies is becoming a more popular activity amongst traders from around the world.