How Does Currency Trading Work?

August 12, 2008 · Posted in Forex 

Trading in the stock market is something we all hear about. Probably less heard, but far from less of a money maker is currency trading. Currency trading is also known as forex markets. It is the largest day trading markets as far as volume and dollar amount. Currency traders trade an average of almost $2 trillion per DAY! Currency trading is basically trading one currency for another. For example: trading the US Dollar for the Euro. While most trading is done at a larger level like banks and large companies, there are also day traders that are individuals like you and I. While there are exchanges for converting currencies, currency traders trade directly with other traders. Trading centers are located in London, New York, and Tokyo which is the larges.

Interestingly, while traders can use the currently markets that are used for other markets, their trades aren’t being handles by an exchange, but by a currency broker. These brokers can make their own market. This means that traders using different brokers won’t necessarily see the same as the other. Sometimes a broker won’t charge a percentage, because instead, they take a cut from the spread since they control that.

Each currency market has a minimum price change called a tick size as well as a minimum trading amount. As for EUR/USD (Euro to US Dollar) the minimum price change is 0.0001, and the minimum amount that you can trade is around $25,000. The calculation used for the minimum price change, then, is 0.0001 x $25000 which is $2.50. So for every 0.0001 change in price, the trader will see a profit or loss or $2.50.

Although currency market can be day traded, there are some features that cause them to be less a preferred day trading market. If you actually want to trade the currency markets for day trading purposes only, then the futures markets offer enough markets based on currencies, you should trade the futures markets instead. But if you want to trade currencies and actually keep other currencies then the currency markets are the markets you should be interested in.

Currency trading, like all forms of trading, should be thoroughly understood before you delve into it. And just like with all trading forms, you should be prepared to loss what you put in. Experts suggest that you find a mentor in any form of trading. This should be someone that is experienced and knows what they’re doing. Not necessarily a broker, as mentioned, they take their money by adjusting the spread.


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