This article aims to serve as a currency trading guide for dummies (beginners), providing some background info on currency trading, and explaining how the FOREX market can be accessed.
The FOREX market is the most widely traded market in the world (by volume), with trillions of dollars worth of currencies being exchanged on a daily basis. Much of the trading is speculative (individual traders or investment firms purchase currencies with the intention of yielding a profit), but the FOREX market is also accessed for other reasons e.g. a family may exchange American Dollars for Euros if they are visiting Germany.
Currency Trading – The Advantages
Trading currencies offers investors some unique advantages. For example, it operates 24 hours per day, 5 days a week, and over-the-counter (OTC) trading takes place 7 days a week. This feature gives traders flexibility.
The value of a currency is displayed relative to the value of another currency, in a currency pair e.g. USD/CAD, GBP/EUR, USD/EUR. Therefore, traders need to consider changes to the value of both currencies in the pair, as they both determine the exchange rate. Certain currencies are much more volatile than stocks. This means that it is possible to generate large returns (or losses) in a short period of time.
Popular currencies, such as the USD, are highly liquid (there is a constant stream of supply and demand for the asset, meaning that you can easily take up, or close your position.)
How to Trade FOREX
You can trade FOREX by simply purchasing a currency, and selling it once its value has risen (relative to other assets.) There are several other ways of trading, for example, you can use CFDs (contract for difference) to make a profit when the value of a currency rises (if you have taken a long position) or falls (if you have taken a short position.)
Stock or bond trading is better suited for investors who want to get paid for owning the asset (owning a stock can result in a dividend payment, and owning a bond can result in a coupon payment.)