What Is Currency Trading?

Every new trader is wondering how they can make money on currency exchange and how this procedure is performed online. To start the work, you need to figure out what Forex is and how the tools on a specialized website operate. It is clear that you can trade any product, but how can you get rich by selling money? This and other questions will be answered in this article.

In order to get started, you need to be able to use electronic wallets or create foreign accounts in your bank. Detailed instructions can be found on the web. You can do it in another way – create an account in your national currency on Forex and save on conversion.

The fact is that when operating currency pairs, you do not need to buy different currencies. It is enough to guess the difference in exchange rates and get your income. To achieve that, it is necessary to figure out what currency trading is, what forms there are, define currency pairs, and describe their types. You will also get answers to the most common questions at the end.

Currency Trading: Basics

Before answering this question, let’s explain one thing. There are two common terms, “foreign exchange” (FE) and “currency trading” (CT), that are similar in essence. You can use one of them at your own discretion. CT is the interchange of virtual banknotes between individuals or legal entities at exchange rates.

How Does Currency Trading Work?

CT works thanks to the existence of a currency trading market. This is a system that does not have a single center. In fact, it is a network that includes many financial organizations. In this space, various transactions are carried out using digital tools. The system works in almost all countries of the world and operates around the clock. It is enough to have a PC or a mobile device to join Forex.

The concept of earning money on Forex is simple. You need to speculate, buy the currency at the lowest price and sell at the maximum. For convenience, the concept of a “currency pair” was introduced. For instance, you buy USD for CNY and hope that the dollar will strengthen and become more expensive.

If you guessed right, you can sell dollars at the best exchange rate and get the difference. This is your profit. Despite the fact that the dollar is rising and the yuan is falling, the most popular pair is not USD/CNY, but EUR/USD because both currencies in the pair possess high volatility.

Remember that when buying this pair, it is not necessary to change dollars to euros. You can use only dollars and make a profit or loss depending on how the world exchange rates change. The paradox is that you are trading a currency without buying the currency itself. A Forex participant makes a deal with an organization, hoping that their forecast will be correct.

Forms of Forex Trading

Forex offers several different tools for making money. Some types of trading have become popular, while others are in less demand. Investors and traders can cooperate in various ways, looking for more profitable options for themselves. A deal is possible only when both parties are interested in carrying it out.

Beginners choose simpler methods, while professionals tend to complex schemes that generate income over a longer period. It is recommended to start from simple and move on to complex methods with experience in order to minimize the risks. Next, the recognized forms of online trading will be listed.

Spot transactions. This is one of the most popular types of deals for single traders. Today, it is about 29-30% of all Forex transactions. The particularity of the ST is that they are performed at the current exchange rate. This is called a spot rate. Both sides are familiar with the rules and agree on the current value of the currency. The Bank for International Settlements conducted a study and found that the percentage of such transactions increases annually.

It’s clear that ST has benefits for novice traders, as it is possible to perform an instant operation with a quick transfer of income to the account. Given the fast withdrawal of funds from the exchange, this is a great option for those who want to earn money fast. It is interesting to know that legal entities rarely use this type of deal.

Foreign exchange swaps. This is the most common type of interaction between companies on the Forex. The essence of the event is that one organization gives a loan, and the other, after receiving it, makes a currency exchange. At the same time, the date of exchange and the price of an asset are negotiated in advance. BIS reports that more than 50% of all Forex transactions are in FES format. Individuals also use this “deferred exchange method”, but less often.

FES is better than ST because it is easier for the parties to agree. The fact is that each of the parties sees the current exchange rate and will not agree if the operation is obviously unprofitable. When a deal is postponed for the future, then everyone can stay with their opinion. It is impossible to cancel the swap, and this is one of the mandatory conditions. The only drawback is that you need to wait for the set date.

Currency swaps. This method is similar to FES and works on the same principle. The difference is that interest rate swaps are also taken into account in this case. BIS provides information that no more than 1.96% of all Forex transactions are carried out within the framework of CS. Obviously, the method is popular these days, but there are situations when it is still relevant.

Forward Contract. It is a deal under which one party undertakes to transfer an asset, and the other undertakes to accept it. At the same time, there are mutual monetary obligations that must be fulfilled. The contract stipulates strict deadlines for execution. Prices are fixed at the time of signing the agreement. Currently, the following types of forwards are the most popular: NDF (non-deliverable) and DF (deliverable).

Only 14% of Forex transactions are concluded in the form of forward contracts. There are forwards with an open date, in which case the execution date has not been determined. The disadvantage of the contract is the impossibility of breaking it. The conditions must be fulfilled even if they have become unprofitable for one of the parties.

What Is a Currency Pair and How to Read It?

A currency pair is a couple of currencies separated by a slash, for example, USD/JPY. In this example, dollars are the base currency. Then, the yen is a quoted currency. In other words, the pair displays how many Japanese yen it takes to buy one American dollar. Some pairs are more popular, while others are less popular on Forex. Let’s look at them further specifying the percentage of the market share.

Major Currency Pairs

Each pair that has the US dollar can be considered the main one. Let’s list a few main pairs below.

• 28.14% EUR/USD;
• 12.92% USD/JPY;
• 11.06% GBP/USD;
• 6.44% AUD/USD;
• 5.18% USD/CAD;
• 4.51% USD/CHF.

Minor Currency Pairs

As a rule, secondary pairs include cross-currency pairs that do not have the US dollar. They are less popular because they are based on less stable currencies. They are used less frequently on Forex. However, they can be profitable, especially when the political situation in individual countries changes dramatically. Let’s list a few popular secondary pairs below.

• 2.66% EUR/GBP;
• 2.65% AUD/JPY;
• 1.81% EUR/AUD;
• 0.99% AUD/NZD;
• 0.87% GBP/CAD;
• 0.76% GBP/CHF.

Exotic Currency Pairs

Such pairs are found on the stock exchange less often, some of them very rarely.

• 0.66% CAD/JPY;
• 0.58% GBP/NZD;
• 0.51% CAD/CHF;
• 0.47% CHF/JPY;
• 0.39% NZD/CAD;
• 0.31% NZD/CHF.

Factors that Can Affect the Price of a Currency

The price of currencies may change as a result of changes in the credit policy of the Central Bank or other credit institutions in particular countries. Publications from reputable sources can affect the exchange rates. Political events have a great impact on these. Other factors are also important: the global crisis, inflation, emergencies, the epidemiological situation, and many others.

FAQ

How Does Currency Trading Work?

On Forex you speculate in currency. You look for the best prices and sell the currency at the best exchange rate. You can also buy a currency, hoping for an increase in its value. You can work with currency pairs. You can register directly or through a broker who will be an intermediary.

How to Make Money on Forex Currency Trading?

After registration, you can choose the form of trading and try to guess the difference in exchange rates. It is recommended to start with the simplest currency pairs. There are many guides and recommendations on the internet. You should trust only official representatives.

How Much Money Do I Need to Start Trading?

It all depends on the broker, but the minimum deposit is usually $10. To open an account for internal trading, you will need $100. An ECN account implies a minimum deposit of $300. It is recommended to carefully read the terms of the agreement when registering.