Currency

The purpose of currency trading is to make as much profit as possible when buying and selling two different currencies. In principle, you can trade with any currency, but among the most traded currency pairs are EUR/USD, GBP/USD and USD/JPY.

What is Currency Trading?

forex

Currency trading is called Forex, Foreign Exchange and is the most popular financial market. Some estimate that forex trading has a daily turnover of about $5 trillion. When you trade currencies, you buy one currency and sell another so-called currency pairs. Currency pairs are written e.g. as follows: EUR/GBP (base currency/counter currency). The first currency, in this case the euro, is called the base currency and the second is the counter currency (here the British pound).

When trading currency pairs, there are two scenarios:

  1. You decide to buy EUR/JPY. You think the euro is strengthening against the Japanese yen and when it does, you have made a profit. Simply put, you bought the base currency (EUR) and sold the counter currency (JPY).
  2. You want to sell EUR/JPY. You are guessing that the base currency will weaken against the counter currency and therefore you should sell the currency pair. When the value decreases, you can buy back the base currency at a cheaper price and thereby make a profit.

When Can You Trade Currency?

It is basically possible to trade currency around the clock because when it is night and closed in one place, it is day and open in another place in the world. The week's currency trading begins in Australia and ends in the United States.

Who Trades in Currency?

Each country's central bank has the task of keeping inflation in the country at reasonable levels by stabilizing the country's currency or by having a foreign exchange reserve and these can be achieved with the help of foreign exchange trading. International companies trading with other countries also buy a certain currency to guard against excessive exchange rate changes. Private individuals invest also in order to make a profit.

What Affects the Foreign Exchange Market?

What governs a currency's exchange rate development is supply and demand and the factors affecting the exchange rates are for example various political and economic decisions, the monetary policy pursued in a country and the currency speculations.

Pips

The term pips, percentage in point, is used in connection with the exchange rate change in currency pairs and the unit is written with four decimal places, but there are cases where five decimal places are used. Let us take EUR/USD as an example; Assume that EUR/USD is sold for 1.1043 but goes down to 1.1039, then the price has fallen by 4 pips and in this case corresponds to 0.0004 $.


Currency Trading and Leverage

Traders who have less capital can go in and invest with the help of leverage. Simply put, the trader borrows money from the broker to increase his capital. Let's say the price development is 0.5%, then a small invested capital of $100 gives only $0.50 while the same percentage of a capital of $100,000 gives $500 in profit.
This means that the larger the invested capital, the greater the profits and therefore many traders use the leverage effect when they trade. But it is also important to remember that even the losses increase if the price development goes in the opposite direction and therefore it is important to never invest more than you can afford to lose.

Abbreviations of The Most Common Currencies

It is good to know the abbreviations for the most traded currencies:

  • USD - US dollars
  • EUR - Euro
  • GBP - British pounds
  • AUD - Australian dollar
  • CAD - Canadian dollars
  • CHF - Swiss franc
  • JPY - Japanese Yen

Demo Account

The currency brokers offer demo accounts loaded with play money so you can practice currency trading. At first it may seem a bit complicated, but with a little practice you will have the basic knowledge of how currency trading works. The great thing about a test account for currency trading is that you do not risk your own money.

Cfd Brokers

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