In financial terms, currency trading market is termed as foreign exchange market or forex market. Foreign exchange is the world’s largest investment market. It has a turnover of close to $5 trillion on a daily basis which continues to grow annually. This is a marketplace where currencies around the world are purchased and sold with the objective of earning profits. The concept is based entirely on speculative trading.
Retail investors, financial institutions and business corporations often trade these currencies. Their aim is to either make profits or conduct business across different markets in the world. Forex market is such that retail investors can also benefit from investing in currencies.
How Does Currency Trading Market Work?
Foreign exchange market doesn’t have any centralized locations from where currencies are traded. There are three major trading sessions for currency exchange – European, United States and Asian. Due to overlaps in the sessions, some currencies would be traded for more volumes during some sessions. Based on these volume trades, currency is traded in various lot sizes like micro, mini and standard lots.
The trading of currencies usually happens in pairs. However, unlike stock markets, where you can buy or sell single stock, in foreign exchange, you have to buy one and sell another currency. The currencies are rounded off to the fourth decimal point. A pip is the smallest percentage of a point, which equals to 1/100th of 1%. Currency trading is confined only to 18 pairs of currency – US dollars, Canadian dollars, Euros, Pounds, Swiss francs, New Zealand dollar, Australian dollar and Japanese Yen.
Changes in Currency Values and Risks Involved In forex market, currencies often change their values. These changes depend upon reactions of external economic and political changes, or even by trading in the market itself. This results in increased or decreased demand of that particular currency.
Trading in Forex has its own share of risks. The reason for the risk is that currencies are leveraged really high and the regulations are very few. Plus, spot trades aren’t regulated. If you are just beginning in the trading market, you should start with trading initially on practice platforms. This allows youto make hypothetical trades without putting your investment capital on a risk. As you see yourself getting prepared, you can start trading on Forex, right away.