Currency Trading
Tue, Apr 15Currency trading, also known as forex trading or foreign exchange trading, involves the buying and selling of currencies on the forex market with the goal of generating a profit. It is one of the most actively traded markets globally, with individuals, corporations, and banks contributing to a daily average trading volume exceeding $5 trillion.
Unlike stocks or commodities, currency trading occurs directly between two parties in an over-the-counter (OTC) market rather than on exchanges. The forex market operates through a worldwide network of banks, centered in four major trading hubs located in different time zones: London, New York, Sydney, and Tokyo.
Currency trading functions similarly to any other exchange, where one asset is purchased using a currency. In the forex context, the market price indicates how much of one currency is needed to acquire another. For instance, the EUR/USD exchange rate reveals how many US dollars are required to buy one euro.
There are two common methods for trading in the currency markets: using derivative products or through a forex broker. The most popular forex derivatives include spread bets and CFDs.
| Ways to Trade | Product | Description |
|---|---|---|
| Forex Derivatives Provider | Spread Bet | A forex spread bet allows you to speculate on the future price direction of a currency pair. Your profit or loss depends on how much the market moves in your favor before you close your position and the amount of money you have invested per point of movement. |
| Forex Derivatives Provider | CFD | A forex CFD is a contract to exchange the difference in the price of a forex pair from when you open your position to when you close it. If the market price moves in your favor, you profit; if it moves against you, you incur a loss. |
| Forex Broker | Currencies | A forex broker is a company that buys and sells currencies on behalf of retail traders, typically through a forex trading platform. Similar to stockbrokers, they charge a fee, usually in the form of a spread rather than a commission, to execute orders for their clients. However, a significant difference is that forex brokers conduct trades over-the-counter instead of on an exchange. |
Traditionally, many currency trades have been executed through a forex broker, but with the advent of online trading, traders can now capitalize on currency price fluctuations using derivatives like spread betting or CFD trading.
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