Wondering what currency trading is? Well, have you ever been to a foreign country? If so, did you have to convert your home country’s currency into a foreign currency? If you did, you engaged in currency trading. You traded one currency, say the American dollar, for another currency, say the Malaysian Ringgit. Every time you trade your currency, the broker was taking a cut, usually a few percent, from your money.
Of course, this type of currency trading likely isn’t the type you are interested in learning about, is it? You most likely want to learn about Forex trading. This type of trading more or less refers to when institutions and traders engage in currency trading, often for the purpose of generating profits.
Forex trading and currency trading
Forex trading is currency trading. The difference between Forex trading and currency trading we outlined in the first paragraph is that Forex trading happens on a much larger scale and is handled through automated electronic trading systems. No more hopping on a plane or even driving to your local bank. With Forex trading you can simply log onto a trading platform through your computer and trade away.
Thing is, in the globalized economy, major banks, multinational corporations, and other global companies need access to numerous different exchanges and they need to do so quickly. General Electric needs to buy supplies for its factories in China. JP Morgan needs to pay its staff in Hong Kong. Ford needs to buy components in India. In order to do so, these companies (and many, many more) need access to foreign currencies.
This creates a huge global market for currencies, most of which are now free floating, with market demand setting exchange rates. As exchange rates move up and down there is a chance to make profits off of currency trading. Think about it this way, if you live in the United States and visited Malaysia in May of 2013, the exchange rate was about RM3.00 to one USD. By the fall off 2013, however, the exchange rate was closer to RM3.30. That .3 difference represents an opportunity to produce profits.
Getting involved in currency trading
If you want to engage in currency trading, you just need some money to invest and a computer connection. Most currency trading is now conducted online and through the use of Forex trading platforms. There are a variety of these platforms and each one offers its own advantages and disadvantages.
One important concept you need to understand in currency trading is the idea of leverage. You see, currencies usually move up and down only at slow rates. This means that the chance to make money, and also lose money, is rather low. As such, banks and other trading institutions offer leverage, or essentially they loan you money, usually at very low interest rates.
Often, the leverage levels in Forex trading can be enormous, going has high as 100 to 1 or more. That means you can invest $1000 dollars of your own money, but will be able to buy $100,000 dollars worth of foreign currencies. If prices rise by even a tenth of a percent, you can make huge returns on your initial $1,000 dollar investment!
Of course, if you bet wrong and prices head in the wrong direction, you can lose your $1,000 dollar investment very quickly. Using leverage allows you to increase risks, which in turn allows you to make more money. But as with any type of investment, the more potential there is to make money, the greater the potential there is to lose money.
Always keep that in mind when you engage in currency trading or you could end up losing money before you even realize it!