Currency trading, forex trading, or foreign exchange trading is the buying and selling of currencies on the forex market with the aim of making a profit.
It is one of the most actively traded markets in the world, with individuals, corporations, and banks contributing to a daily average trading volume of more than $5 trillion.
Unlike shares or commodities, currency trading does not take place on exchanges but directly between two parties, in an over-the-counter (OTC) market.
The forex market is run by a global network of banks, spread across four major forex trading centers in different time zones: London, New York, Sydney, and Tokyo.
Currency trading works like any other exchange where you are buying one asset using a currency. In the case of forex, the market price tells a trader how much of one currency is required to purchase another.
For example, the EUR/USD currency exchange rate shows how many US dollars buy one euro.
There are two popular ways to trade the currency markets. Either with derivative products or through a forex broker.
The most popular forex derivatives are spread bets and CFDs.
|Ways to Trade||Product||Description|
|Forex Derivatives Provider||Spread Bet||A forex spread bet enables you to speculate on the future price direction of a currency pair. Your profit or loss is dictated by how far the market moves in your favor before you close your position and how much money you have put an upper point of movement.|
|Forex Derivatives Provider||CFD||A forex CFD is an agreement to exchange the difference in the price of a forex pair from when you open your position to when you close it. If the market price moves in your chosen direction, you would profit, and if it moves against you, you would make a loss.|
|Forex Broker||Currencies||A forex broker is a firm that buys and sells currencies on behalf of retail traders, usually via a forex trading platform. Like stockbrokers, they charge a fee though usually in the form of a spread instead of commission – in order to execute orders placed by their clients. However, a key difference is that forex brokers will place trades over-the-counter instead of on an exchange.|
Traditionally, a lot of currency trades have been made via a forex broker, but with the rise of online trading, you can take advantage of currency price movements using derivatives like spread betting or CFD trading.
Vincent Nyagaka is a Professional Trader, Analyst &. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Checkout Vincent’s Professional Trading Course here.