Currency Trading Basics

In order to properly learn the basics of currency trading and its how-to’s, it is essential to have an understanding of what currency trading is and where it happens. Currency trading occurs at the foreign exchange market or the forex market which is the largest trading market in the world. It is in operations for 24 hours except on weekends so a forex trader has the power over when to trade and how to trade.  The trading week starts on Sunday, 5:00 PM (Eastern Standard Time) until Friday, 4:00 PM (Eastern Standard Time). 

Unlike the stock market where stocks, options, futures and securities are exchanged, the foreign exchange market allows for the trading of currencies so one currency can be used to buy another currency. Ironically, while the currency market determines the relative value of different currencies, it is also with the movement of these values that a trader can potentially profit from. 

London is the main trading center however; New York, Tokyo, Hong Kong and Singapore are very significant cities as well. Banks all over the world participate in the trading and the trading takes place in cycles throughout the day; When the Asian trading session ends, the European trading session starts followed by the North American trading session, then goes back to the Asian trading session. To understand currency basics involved in currency trading, here are the most traded currencies shown with the name of the currencies and their corresponding international standard names (or the currency codes) in compliance with ISO 4217 set by the International Organization for Standardization (ISO):

Currency Trading Basics - ISO 4217 Currency Codes

• United States Dollar (USD)
• Euro (EUR)
• Japanese Yen (JPY)
• Pound Sterling (GBP)
• Swiss Franc (CHF)
• Australian Dollar (AUD)
• Canadian Dollar (CAD)
• Swedish Krona (SEK)
• Hong Kong Dollar (HKD)
• Norwegian Krone (NOK)
• New Zealand Dollar (NZD)
• Mexican Peso (MXN)
• Singapore Dollar (SGD)
• South Korean Won (KRW)

Currency pairs are the means for a forex trader or investor to trade in the market.  A currency pair is the exchange rate of a currency over another currency. The Majors or the most traded currencies are as follows: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD. They are considered the biggest players in the currency trading market and constitute 85% of the market share.  With this, these currency pairs have a higher ability to be traded without causing a major shift in the price and will have an insignificant loss in value. In other words, these currencies have higher market liquidity. The first currency in the pair is called the base currency while the latter is called the counter currency. The exchange rate is the number of units of the counter currency the trader needs to pay to buy a unit of the base currency.

As mentioned earlier, the movement of the currency influences how a trader can profit from the forex market. To illustrate the trading basics, let’s use the currency pair EUR/USD as an example: If the trader thinks that the EUR will be of more value against the USD, the trader can by the Euros with US Dollars.  Once the exchange rate goes up, the trader can sell his Euros and obtain his profit. 

Remember that currency trading has a substantial amount of risk involved.  Although there have been numerous successes in the foreign exchange market, there’s still a risk of losing a lot of money so it takes patience and determination to be a successful trader. Make sure to do as much research as you can before jumping in and when you do, participate in the trading gradually. Put together a back-up plan just in case you fail. The back-up plan shouldn’t mean that you’re setting yourself up for failure but keep in mind that trading can sometimes be very unpredictable. As much as possible, hire a private financial advisor or a good broker to assist you.