Online Currency Trading

Written by Jacey Harmon
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Currency trading is the simultaneous buying and selling of different currencies with the intent to profit from changes in the value of a specific currency. Currency trading differs from stock trading as you do not buy a currency, you exchange your currency for someone else's currency. For example, you wouldn't buy a Canadian dollar on the market; you would "exchange" your currency for the Canadian dollar.

The structure of currency trading causes currencies to be bunched in pairs. The U.S. dollar may be paired with the euro or the British pound individually but never with both of the other currencies. The centerpiece for the currency market is the U.S. dollar, as most currencies are traded against the dollar. Currencies trades that do not involve the U.S. dollar are called "cross currencies."

In currency quotes, the first currency listed is the base currency and the base currency's value is always one. For example, a quote of USD/CAD of 1.5 would mean it takes 1.5 Canadian dollars to buy one U.S. dollar. When the quote rises, it signals that the base currency is strengthening; when the quote falls, it signals the base currency is weakening. The U.S. dollar is the base for all currencies except the British pound, euro, and Australian dollar.

Trading Currencies

Currency trading is not centered on an exchange floor like with stocks, bonds, and futures. Instead, the currency market is an "inter-bank" market where trades occur over the telephone or through an electronic network. Currency trading occurs 24 hours a day with the trading day starting in Sydney and rotating around the world to New York City.

Corporations who have international operations participate in the currency market. They must exchange currencies to buy goods in foreign lands or to convert capital from sold goods to their home currency. Governments are also active in the currency market as they need to exchange currency to invest in a foreign government's bonds. However, the most active participant in the currency market is the speculator: a trader who simply trades currencies for a profit.


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