What Is Currency Trading?
Currency trading (also known as forex trading or foreign exchange) is the action of exchanging one nation's designated form of money for another's. Currency trading offers an individual numerous options to capitalise on and potentially profit from the fluctuating values of global currencies. Specific disciplines such as short-term intraday trading, portfolio hedging and long-term capital investment are all viable financial practices that fit well within the context of currency trading.
In contrast to earlier times, the cutting-edge atmosphere of the electronic marketplace has given participants a way of precisely buying and selling financial instruments at near light speeds. When coupled with technological innovation, the active trade of currencies has grown into the world's largest over-the-counter (OTC) marketplace: forex.
Common Currency Pairs
In the forex market, there are several currencies that are traded with a greater frequency and exhibit a higher degree of liquidity than most others. These currencies are known simply as the "majors," and they're local to nations with political stability and strong economic foundations.
What Are The Forex Currency Majors?
- AUD: Australian dollar
- CAD: Canadian dollar
- CHF: Swiss franc
- EUR: Euro
- GBP: British pound
- JPY: Japanese yen
- NZD: New Zealand dollar
- USD: United States dollar
Currencies are traded in relation to one another on the forex market within a currency pairing. Each specific currency pairing is unique, offering distinct potential trading opportunities. Major currencies that are paired with the USD are considered to be "major pairs," which are frequently traded all over the world and offer enhanced market liquidity.
What Are The Major Forex Currency Pairs?
The designation of "major pair" is subject to change depending upon current market conditions and traded volume.
Other pairings are traded in conjunction with commodity pricing or domestic interest rates. Commodity pairs such as AUD/USD, USD/CAD or the NZD/USD are actively traded in relation to the market pricing of energy products, foodstuffs or interest rates.
Why Trade Currencies?
- Liquidity: The forex market is the world's largest marketplace, creating an abundance of buyers and sellers willing to trade at a desired price.
- Volatility: Although some currency pairings experience larger exchange rate fluctuations than others, active pricing volatility is common.
- Potential trading opportunities: Profit or loss can be derived from either buying or selling a currency pair. A trader can take long or short positions, thus enabling profit or loss from both bullish and bearish markets.
- Leverage: Depending upon the trading account parameters, enhanced leverage can be used to achieve profit. Margin trading increases the purchasing power of the account, and it can enhance profit or loss exponentially.
What Can You Trade?
Aside from buying and holding assorted physical currencies, there are several different avenues by which an individual can become involved in foreign currency exchange. One can trade the currencies of the world via the forex market or futures markets, or through broker-direct products.
By far, the most popular way to trade currencies is on the forex market. With an average daily traded volume measuring between US$4 and US$6 trillion, the forex market provides vast liquidity to both institutional and retail traders.
Futures exchanges are another approach to trading currencies. FX futures, or foreign exchange futures contracts, provide traders the opportunity to exchange one currency for another at a predetermined future date. Exchanges such as the CME Globex facilitate the trade of currency-based futures contracts.
Broker-direct products such as a contract for difference (CFD) are also available to individuals in interested in currency trading. A CFD is a derivative product where the buyer is responsible for paying the difference in price of the underlying asset from the beginning of the contract until the end.
Who Can Trade Currencies?
Participants of global currency markets vary wildly in classification. Investment banks, central banks and multinational corporations are the largest players involved in the foreign exchange marketplace. Individual traders, both institutional and retail, operate on a much smaller scale but still generate large volumes.
As long as there is adequate capital to open a trading account, almost anyone can participate in the forex market. Certain age restrictions or broker-specific guidelines govern whether or not an individual account can be opened, but if satisfied, it is relatively simple to begin trading.
However, there are specific areas where forex trading, including CFDs, is discouraged or banned outright. The list of countries and regions prohibiting forex trade is lengthy and ever-changing. The following countries are the most recognisable that do not currently allow forex trading.
Where Is Forex Trading Banned?
- South Korea
Ultimately, it is up the trader to find out the legality of forex trading in his or her country, region or municipality.
When Can You Trade Currencies?
Major global currency markets operate Monday through Friday on the following schedule:
- London: 3 a.m. - 12 p.m. EST
- New York: 8 a.m. - 5 p.m. EST
- Sydney: 5 a.m. - 2 a.m. EST
- Tokyo: 7 p.m. - 4 a.m. EST
The forex market is open for business 24 hours a day, five days a week. It is important to understand that while the forex market technically never closes, most of the global financial institutions that actively trade currencies are closed on weekends. As a result, both volume and liquidity are reduced greatly on Saturday and Sunday of each week.
From the perspective of the intraday trader, liquid markets fueled by volume are the most desirable and potentially profitable. Although the forex market is always open, the business hours of the world's major financial centers provide the most positive trading conditions.
Where Can You Trade Currency?
As technology has evolved, traditional brick-and-mortar financial centers have given way to the electronic marketplace. The digital format affords traders the luxury of being able to interact with the market remotely through internet connectivity. Essentially, anywhere there is an internet connection, the likelihood of trading may exist.
Currency trading via the forex market is presented as an exclusively digital marketplace, accessible only online. This means that the only way for an individual to actually trade currencies is to obtain market access through securing both a software trading platform and internet connectivity.
Trading platforms come in all shapes and sizes, each with unique functionality. The platform itself is key to the success and long-term viability of a trading operation. In terms of forex, the following currency trading platforms provide the trader robust functionality through advanced analytics and trade execution:
How Do I Trade A Currency?
Getting started trading currencies in the forex market is a relatively simple process, with limited barriers to entry. However, in order to participate in the electronic marketplace, there are a few basic inputs needed to begin active trading:
- Computer hardware
- Internet connectivity
- Software trading platform
Aside from the physical components needed to conduct trading operations, market access must be available. In order to secure market access, an individual retail trader must open a trading account through a brokerage firm. Brokers cater to a wide range of traders and investors, and actually facilitate a client's trading activities within the marketplace.
Depending upon the brokerage firm and type of account, particular requirements are to be met before the account will be opened. Common information and prerequisites needed for opening a trading account are:
- Personal identification
- Employment verification
- Asset disclosure
- Capital deposit
Upon the activation of the account and the physical components being in place, the trading operation is open for business.
If long-term profitability is of paramount importance to the trader, then the development of a comprehensive trading plan and proper money management strategy is necessary before active trading.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…