“What is Currency Trading?”Currency Trading is the act of buying and selling (trading) different currencies of the world. The Foreign Exchange (or Forex) is the market that allows you to trade currencies in volume.
A currency trader – whether bank, corporation, or individual – must be well acquainted and skilled in the ways of the Forex market, monitoring and acting on the subtle changes that indicate the potential for profit.
A typical scenario might go something like this: A trader is looking at the British pound (GBP) and U.S. dollar (USD). This is called a Currency Pair.
The GBP is the base currency, and the USD is the secondary currency. News that the value of the GBP is up from previous reports creates a positive reaction and a spike in the value of the GBP. This, in turn, will cause a rally on the GBP/USD currency pair.
However, if the opposite occurred, and a positive announcement for the USD was reported, then the GBP/USD currency pair would fall, or dip. Either scenario can offer up a profit, depending on which part of the currency pair is bought or sold.
The price of each currency within the pair is determined by a number of factors, such as changes in political leadership, economic booms or busts, even natural disasters.
Any news that has the potential to influence the strength of a particular currency – however remotely – can swing the value of a currency trade in a matter of minutes.
Currency trading can be very risky at times. Currencies can often be very volatile compared to other markets. The definite key to success with currency trading is to use conservative risk management.
There are multiple aspects to effective currency risk management, however, in the end, you should always approach trading currency with caution and have a solid trading plan.
Retail currency trading is typically done through market makers and brokers. Traders can place trades through their brokers who will then place that trade on the interbank market.