What is Currency Trading?

What is Currency Trading?

There are lots of people who would like to know answers to queries like what is currency trading? Basically, currency trading refers to the act of trading such as buying and selling of the various currencies used around the world. Although this was primarily done before by large financial institutions, banks and companies, today lots of individuals are making small investments in this type of financial market. Because of the internet, there are more people who would like to understand how they can possibly earn from trading currencies of the world.

Currency trading and other markets

People who would like to enter the forex market may also ask what is currency trading and how does it differ from other types of market? Those who would like to get involved in currency trading do not have to go to places where regulated exchange is observed just like when trading stocks or commodities. Individuals who trade in the forex market base their transactions on credit agreements and in such case, currency trading is considered as the most liquid type of market.

There are no governing agencies and regulatory boards that control transactions in the forex market. However, those who would like to get into currency trading may become members of the NFA (National Futures Association) so that in the event that they will encounter some disputes, they will be able to resolve it through arbitration.
Are there commissions in currency trading?

When seeking details about the question what is currency trading, it is important for people to know how they will earn from it. Those who are into the stock market, the futures and options market, they engage the services of a broker who provides the services as an agent. Traders pay the broker for every transaction that they do. However, this does not work in currency trading. The forex market operates on the principals-only market concept. Although there are forex companies, these are not brokers. The dealers serve as counterpart to the traders who invest. Currency traders earn money not through commission but through the bid-ask spread.

What is a pip?

Another concept that needs to be clarified when answering the question what is currency trading is about pips. A percentage in point (Pip) is considered as an increment of trade. Prices of the currencies are quoted up to the 4th decimal point. One pip is usually equated to 1% or 1/100th.

What do forex traders buy and sell in currency market?

People have to understand they are actually buying and selling nothing when they trade currencies. They do not actually get hold of the currencies being transacted. Trades happen online and they are reflected in the account of the forex traders. So if they make a profit or incur a loss, these are recorded in their trader’s account. Individuals have to know a lot of things as they look for more information on queries like what is currency trading all about?
Why currencies change in value

Individuals who would like to work on currency trading have to be aware of political as well as economic issues that may affect the value of certain currencies. There are times when the changes in currency values are brought about by the speculators themselves. The changes may also be caused by business flows or needs.

Risks in currency trading

Although investors may earn a considerable profit in trading currencies, they also have to take huge risks in doing so. The volatility of this market is far greater than that of other types of markets. Individuals have to learn to manage the amount of risks that they are taking and only those who can take winnings and losses may trade in this market. Currency trading is not for everybody.

People who would like to put their money into the forex market do not simply look for the answers to what is currency trading. They will have to understand the factors that are involved, the amount of risks taken and how much they are willing to lose. Just like in any other trading activities, people do not always win but they also lose. They have to know when it is time to lock in their position or to get out of it in order to gain profit and to prevent loss as much as possible.