What Is Currency Trading? - dummies

What Is Currency Trading?

Currency trading is speculation, pure and simple. The securities you’re speculating with are the currencies of various countries. For that reason, currency trading is both about the dynamics of market speculation, or trading, and the factors that affect the value of currencies. Put them together and you’ve got the largest, most dynamic, and most exciting financial market in the world.

Often called the forex market (or FX market), the foreign exchange market is the crossroads for international capital, the intersection through which global commercial and investment flows have to move. International trade flows, such as when a Swiss electronics company purchases Japanese-made components, were the original basis for the development of the forex markets.

The forex market is unique in many respects:

  • Because the volumes are huge, liquidity is ever present.

  • The forex market operates around the clock six days a week, giving traders access to the market any time they need it.

  • Few trading restrictions exist — no daily trading limits up or down, no restrictions on position sizes, and no requirements on selling a currency pair short.

  • There are anywhere from 15 to 20 different currency pairs — pitting the U.S. dollar (USD) against other countries’ currencies or pitting two non-USD currencies against each other — depending on which forex brokerage you deal with.

  • Most individual traders trade currencies via the Internet through a brokerage firm. Online currency trading is typically done on a margin basis, which allows individual traders to trade in larger amounts by leveraging the amount of margin on deposit.

Speculating is all about taking on financial risk in the hope of making a profit. But it’s not gambling (playing with money even when you know the odds are stacked against you) or investing (minimizing risk and maximizing return, usually over a long time period). Speculating, or active trading, is about taking calculated financial risks to attempt to realize a profitable return, usually over a very short time horizon.