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Currency Trading: What Every Trader Has To Know!

April 28th 2009 04:34 am

Currency trading. by definition, is the barter or exchange of one currency for another. Its just like visiting other places/countries and then you get to trade your currency for that places currency to buy stuff, eat at those foreign restaurants, etc. But talking about currency trading in the market, the meaning of these words are altered. In the niche of forex marketing, traders will trade one currency for another currency in order to gain as much profits as they can.

Currency trading is just the same as trading in stocks on the stock market. The reality is that the average personal investor is being outrun by the stock traders, who buy and sell their stocks quicker than those investors. You see, those investors just take the advice of their respective brokers, but in the end they keep stocks in a span of several years (even decades).

So, how does this go? Lets take an example to demonstrate how traders make profits in this business. Say the present rate of the British pound to euro forex market is around GBP/EUR 1.1200; meaning, to buy a single British pound, you got to have 1.12 euros. Now, if you ever think that the euros value has more chances of rising than the pounds, then you might sell 100,000 pounds and buy 100,000 euros, and then wait.

Several days later, the exchange rate becomes GBP/EUR 1.0600, which means that the pound is only equal to 1.06 euros. So if you get to sell your euros and then you get to buy back 100,000 pounds, you have then got a profit worth 6% of your investment (deducting any fees). Theres not a single trader who has a 100,000 pounds lying around in the bank to trade with. But thats okay, since you really dont have to have all that money in reality.

As youre job is to buy and sell consecutively, all you need to have in your pocket is something that would cover any possible loss in trading before exiting the market (your predictions did not come into reality) and the worth of the currency that you have bought started to fall down. With this, your broker lends you the rest of it. Now, this is known as trading margins. So on a $100,000 trade, the margin is around 1 to 2 percent ($1,000 to $2,000).

Now, this is the amount that you need to have in your forex brokerage account. And the lots determine the amount that you trade in (these lots could be around $10,000 each or more, depending on the currency and the broker). Trade $20,000, and then you trade 2 lots, $30,000 for 3 lots, etc. There are also the limited risk accounts, wherein you get to risk only the cash amount you have on account with the broker, to avoid the margin calls, which is done by allowing smaller players to trade in the forex market with the use of mini-lots/fractions of a lot.

Nowadays, increasing number of people are getting involved in currency trading. It really has its own edge over the stock market. Forex robots are always there if you dont have any knowledge about the value of the different kinds of currencies out there, and they will be the ones that will do the trading for you in accordance to the settings that you choose. Keep in mind that trading in the forex market is a risky business: you can either lose or gain money. These facts will surely give you some helpful idea as you take the next step into becoming a successful currency trader.