There is no doubt that the foreign exchange market is one of the most exciting and fast-paced markets in the financial world. Trading currencies involves making predictions on tiny variations in the global economy and buying and selling accordingly.
The exchange rate between two currencies is the rate at which one currency can be exchanged for another. Traders use this up-to-date data to analyse currencies using economic forecasts to obtain an understanding of the currency’s true value.
A volume of up to $5 trillion of foreign exchange trading takes place each day. It is the most liquid market in the world and this is how it can be differentiated from the other markets. While foreign exchange is typically regarded as the domain of big institutions, central banks and wealthy individuals, the growth of the internet has opened the door to average individuals who have increasingly acknowledged it as an area to be speculated on for its accessibility and potential financial rewards, and have gone on to become increasingly involved in online currency trading.
Before deciding to trade currencies online, it is vital that a trader understands how foreign exchange transactions take place and examines the basic steps on how to go about it. Online currency trading is simply the trading of one currency for another that takes place across the internet. The foreign exchange market is referred to as an over-the-counter market (OTC), meaning that no centralised location such as the FTSE exists from where trading occurs. This unique aspect of the foreign exchange market allows traders market access anywhere across the globe. It is possible to trade currencies 24 hours a day, five days a week without the need to leave home.
Online currency trading is different to more traditional methods of transacting financial instruments in that the majority of trading activities are essentially self-service. All a trader requires is a computer and internet access and they will then be able to figure what, when and how much to buy with a simple click of a mouse. Furthermore, a trader’s orders will be executed instantaneously since they are utilising a broker’s platform.
Another advantage of trading online compared with the more traditional method of trading are lower transaction costs. Brokers are able to focus on high-volume business strategies and lower their costs in order to attract more business, which all ultimately benefit the trader.
Traders who decide to trade currencies online should be aware that trading always takes place in pairs and are referred to as ‘currency pairs’. In each case, currencies have a specific abbreviation assigned to them. This can be illustrated using a typical currency pair such as EUR/USD which denotes the strength of the Euro against that of the U.S. dollar. The first currency in the pair, in this case the Euro, is known as the base currency and USD, the second currency, is known as the quote currency. Traders are able to make trades on a huge range of currency pairs. Experience usually dictates which are likely to present more opportunities for successful trading. All major currency pairs include the USD as either a base or quote currency whereas minor currency pairs exclude the USD. While some traders like to trade exotic currencies such as the Czech koruna or the Thai baht, the majority are involved in trading the seven most liquid currency pairs in the world, comprising of 4 majors (USD/JPY, EUR/USD, USD/CHF & GBP/USD) and 3 commodity pairs (AUD/USD, NZD/USD & USD/CAD) respectively.
The aforementioned currency pairs, together with their different combinations, for example, EUR/JPY, GBP/JPY and EUR/GBP, account for over 95% of all speculative trading in foreign exchange. Taking into account the relatively small number of trading instruments comprising of just 18 pairs and crosses which are actively traded, the foreign exchange market is concentrated to a much larger degree than the stock market.
To assist traders in working out potentially profitable trades, an online broker will usually provide a series of charting tools via their trading platform. When a trader has conducted a complete analysis of the forex exchange market, all transaction activities may be automated via the broker’s trading platform. It is for these reasons that online currency trading has increased dramatically over the other financial activities that were previously chosen by traders.