Exchanging one currency for another is called Forex Trading. Also known as currency trading or FX trading, it gives investors the opportunity to sell one currency for another for speculative purposes, aiming to profit from the market changes. The forex trading market is one of the most volatile and liquid markets nowadays. Every day billions, even trillions of dollars are traded worldwide.
Forex trading refers to the exchange of one currency against another at current market rates. In order to participate, it is necessary to open an account and hold a certain currency – for example EUR. Then you can exchange your currency for another (e.g. USD) for either long or short term. The goal being to make a profit on the fluctuations of currency values.
FX trading is done using currency pairs – the value of one currency is determined by comparison to another. Take this quotation for example – USD/EUR 1.618. Here the US dollar is the base currency and the euro is the quote currency – the price of EUR is expressed in USD – 1 dollar can be traded for 1.618 euro. Using the euro as a base – EUR/USD then will have the value 0.618 – one euro can be exchanged for 0.618 US dollars.
The most favored currency pairs are called The Majors. They include currencies like the US dollar, the euro, the pound sterling, the Swiss franc, the Canadian and Australian dollar. These pairs cover about 85% of the market and have the greatest liquidity.
The official rate quotation is called a spot price. However, in the trading speculative market currencies are offered for sale at an ask price. Traders look to buy a position at their bid price – which is always lower or equal to the ask price. The difference between the buy and the sell price is called the spread. Spreads tend to be smaller for markets with higher liquidity.
Currency values have a direct influence on our lives – the movements in the market can affect economies in a variety of ways. Being one of the most liquid and volatile markets today forex trading is a preferred choice for the experienced investors, as well as the ones just starting out in the trading world.
Foreign exchange trading has gained so much popularity lately, largely thanks to its accessibility – no need for a huge starting capital. You can begin trading today – with no commissions, 24 hours, 5 days a week. With FXPM you can trade on leverage, which gives you the chance to multiply your profits, but also presents a higher risk, as losses would be magnified as well.