-What Is Currency Trading

What is currency trading? To explain in simple terms, it is exchanging one currency for another. Similar to exchanging money when visiting a different country, you trade your own currency for the currency of the country you are visiting.

But when people speak of trading the Forex (aka Foreign Exchange), they are talking about something different. The Forex is a market where currencies are constantly traded in order to gain a profit as the exchange rates change.

This is similar to day trading in the stock market. Trades are constantly happening where folks are buying and selling commodities at different prices.

The best way to demonstrate how the currency market works is to use an example of a specific trade:

Say the current rate of the British pound to the euro is: GBP/EUR 1.1200. That means that in order to buy one British pound you would need 1.12 euros. If you believed that the value of the euro was going to rise compared to the pound, you can sell 100,000 pounds, buy 100,000 euros, and wait. After a week has passed, say the exchange rate has moved to: GBP/EUR 1.0600. Sure enough, the pound is now worth only 1.06 euros. Now if you sell your euros and buy back 100,000 pounds, you will have made a profit of 6% of your investment.

This may sound like a large amount of cash. But fortunately, you don’t have to have that kind of money to trade the Forex. You simply need enough money to cover your losses if there is a drawdown. Your broker loans you the rest.

This is called margin trading. On a $100,000 trade, the margin is usually 1% or 2%, i.e. $1,000 or $2,000. This is the money that you must have in your Forex brokerage account.

The amount you trade is determined by 'lots'. A lot may be worth $10,000 or more depending on the currency and the broker. So if you want to trade $20,000 you would trade 2 lots and so on.

There are now limited risk accounts, where you can only risk the amount of cash you have on account with the broker, thus avoiding margin calls. This is done by allowing smaller players to trade Forex using 'mini lots' or fractions of a lot. So you can trade $1,000 by trading $0.10 of a lot. This reduces risk but may cost more to trade.

With smaller barriers to entry than trading stocks, the Forex market has become an attractive option for more and more folks. The accounts are easy to setup, you don’t need a whole lot of money, risk can minimized, and huge profits can be gained from taking advantage of huge moves. Using a Forex trading robot makes it possible to anyone to profit from the currency market 24 hours a day. There are still risks with trading the Forex, the key is to find the right automated software.