Currency Trading Basics For The Ignorant Investor

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The most active and liquid financial exchange market is not located in Wall Street, London or Tokyo. It lacks a financial center and it operates in a decentralized platform. It does not involving buying shares in a company or speculating in the future prices of crude oil or pork bellies. The foreign exchange (forex) market is a massive global operation that runs around the clock during most days of the week, and yet many investors are not aware of this.

Understanding how forex works is a matter of learning about currency trading basics. Instead of dealing in stocks and bonds, forex traders deal in actual fiat money and legal tender issued by the central banks of sovereign nations. Forex traders seek to profit from the constant fluctuation of global currency exchange rates.

Forex as an Economic Activity

Foreign currency conversion enables international trade. When merchants from different countries choose to purchase goods from each other, they may demand payments in their local currency. A sushi restaurant in New York, for example, may wish to buy nori seaweed from a Japanese supplier. If the Japanese merchant demands payment in yen, the New York sushi chef can buy yen with dollars from a bank or an exchange house. If this is not possible, the Japanese nori supplier can accept the equivalent payment in dollars.

Currency Pairs

Rather than profiting from the actual exchange of one currency for another, forex traders speculate on the

value of currency pairs. Knowing how to read currency pairs is the cornerstone of currency trading basics. Here's an actual quote from early 2013:

EURUSD = 1.3100

The quote above means that one euro was worth $1.31. A forex trader can enter the market with the EURUSD currency pair and go long, meaning that the euro is being purchased at the same time dollars are being sold. Investing $1,310 on that currency pair in the hopes that the euro will go appreciate against the U.S. dollar could result in a profit when the forex trader chooses to exit the market.

Participation in the Forex Markets

Having a clear idea about the types of investors who participate in the forex market is an important factor in learning currency trading basics. Participants such as central banks, interbank operators, investment banking firms, hedge funds, and market makers make up about 40 percent of the forex markets. These major players do not necessarily speculate on the percentage in point (pip) changes of currency pairs; their strategies are often long-term.

Forex traders enjoy lower barriers to entry when compared to investors who trade futures or equities. Forex brokers provide round-the-clock online platforms for electronic trading. There is a high level of competition between brokers, and thus their fees and commissions tend to vary considerably.

By : Chickie Maxwell

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