Currency Trading

Written by Patricia Tunstall
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In 1944, nations attempted to stabilize international currencies in the Bretton Woods Agreement. Realizing that speculation in national currencies contributed to destabilization, nations agreed to measures that would restrict the flow of money from one country to another. Nations promised to try to maintain the value of their currency against the dollar, whose value was correlated to a certain amount of gold. However, the dramatic increase in world trade, beginning after World War II, led to staggering amounts of capital flowing globally.

Foreign exchange rates became increasingly erratic. Consequently, the United States went off the gold standard in 1971. Currency trading then took off, as currency traders recognized the unregulated marketplace as a burgeoning source of potential profit. The forex marketplace was, and is, a developing force in the volatile world of foreign currency exchange.

Currency Trading Today

Spot currency trading exists only because of willing buyers and willing sellers. Price is the overriding factor in forex trading. There is no central stock exchange or bank in which transactions take place. Rather, forex is an over-the-counter, or interbank, forum. Investors conduct business on the phone, computer, or Reuters, an electronic network.

Foreign currencies are always traded in pairs, with the simultaneous purchase of one currency, and the sale of another. For instance, an investor might buy the euro and sell yen. This would be expressed with the symbols for each nation and/or its currency: EUR/JPY. Most currency trading involves the major currencies of stable countries: the United States Dollar, British Pound, Japanese Yen, Australian Dollar, Canadian Dollar, Swiss Franc, and Euro.

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