Currency Trading

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Currency Trading

For the beginners, currency trading may be difficult to understand. It needs a long devotion, daily improvisation, skills, and techniques to be a good trader. Currency trading have a very high risk exposure, in different way like economic risk, transaction risk, translation risk or it may be transformation risk. That’s why it’s very important to know the objectives of investment and risk associated with it before you start the currency trading.

Currency trading on forex market is beneficial because it is the largest trading market in terms of volume. The unique features of currency trading is, it doesn’t require physical appearance of the person i.e. it is not the OTC (over the counter) market, but managed by the networks where international financial institutions, banks, firms, liquidity provider are involved.

So big question, what actually Currency trading is?

SCurrency trading is nothing but trading of two different currency based on exchange rate. As already explained in above, it is exposed high risk level. Henceforth, it is very important to know why trading on currencies? What are you selling or buying in currency markets? To whom currency market is? Below is the brief explanation of everything

What are you really selling or buying in the currency market?

The short answer is "nothing". The retail FX market is purely a speculative market. No physical exchange of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on market price. For dollar-denominated accounts, all profits or losses are calculated in dollars and recorded as such on the trader's account.

The primary reason the FX market exists is to facilitate the exchange of one currency into another for multinational corporations that need to trade currencies continually (for example, for payroll, payment for costs of goods and services from foreign vendors, and merger and acquisition activity). However, these day-to-day corporate needs comprise only about 20% of the market volume. Fully 80% of trades in the currency market are speculative in nature, put on by large financial institutions, multibillion dollar hedge funds and even individuals who want to express their opinions on the economic and geopolitical events of the day.

Because currencies always trade in pairs, when a trader makes a trade he or she is always long one currency and short the other. For example, if a trader sells one standard lot (equivalent to 100,000 units) of EUR/USD, she would, in essence, have exchanged euros for dollars and would now be "short" euros and "long" dollars. To better understand this dynamic, let's use a concrete example. If you went into an electronics store and purchased a computer for $1,000, what would you be doing? You would be exchanging your dollars for a computer. You would basically be "short" $1,000 and "long" one computer. The store would be "long" $1,000 but now "short" one computer in its inventory. The exact same principle applies to the FX market, except that no physical exchange takes place. While all transactions are simply computer entries, the consequences are no less real.

Why Trade Currencies?

Forex is the world's largest market, with about 3.2 trillion US dollars in daily volume and 24-hour market action. Some key differences between Forex and Equities markets are:

  • Many firms don't charge commissions – you pay only the bid/ask spreads.
  • There's 24 hour trading – you dictate when to trade and how to trade.
  • You can trade on leverage, but this can magnify potential gains and losses.
  • You can focus on picking from a few currencies rather than from 5000 stocks.
  • Forex is accessible – you don’t need a lot of money to get started.

Why Currency Trading Is Not For Everyone

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. Remember, you could sustain a loss of some or all of your initial investment, which means that you should not invest money that you cannot afford to lose. If you have any doubts, it is advisable to seek advice from an independent financial advisor.


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