What is currency trading?

What is currency trading? -Forex Signals Service Commonly known as forex trading, currency trading refers to the purchasing and selling of the world’s currencies with the objective of making profits. Unlike stocks or commodities, currency trading does not take place on a regulated exchange and it is not controlled by any central governing body. Instead, forex is an over-the-counter (OTC) market where currencies are traded in financial centres around the globe, such as New York, London, Frankfurt, Tokyo and Sydney. This means the market is open 24 hours a day, with the exception of weekends, giving you the opportunity to trade around the clock.

Currency traders include governments and central banks, commercial banks, other financial institutions and institutional investors, commercial corporations, currency speculators and individuals. Financial centres around the world function as anchors of trading between this wide range of multiple types of buyers and sellers. Trades between the market participants can be extremely large, involving hundreds of millions of dollars.

The forex market assists international investments and trade by enabling currency conversion. For instance, it allows a business in the European Union to import goods from the United States and pay in the US dollars, even though its income is in euros.

Currencies are always traded in pairs. For that, the forex market does not set a currency’s absolute value. Instead, it determines its relative value by setting the market price of one currency if paid for with another. For example: 1 EUR is worth X USD, or GBP, or CHF.

What is currency trading?Therefore, in a typical forex transaction, a party buys some quantity of one currency by paying with some quantity of another currency.

What are the currency pairs available for forex trading?

There are three main types of currency pairs available in the forex market: major, minor and exotic. They are divided into these groups depending on how much they are used daily. The categories consider regular trading activity and liquidity of each currency.

  • Major currency pairs
    Major currency pairs consist of the most frequently traded currencies globally, offering greater liquidity and lower volatility. Those pairs always have the US dollar on one side. There are seven major currency pairs: GBP/USD, EUR/USD, USD/JPY, USD/CHF, USD/CAD, NZD/USD and AUD/USD.
  • Minor currency pairs
    When a currency pair does not include the US dollar, it is called a minor currency pair or a cross-currency pair. Those pairs are less traded than the major currency pairs. For that, they are usually less liquid and have wider spreads. The most widely traded minor pairs consist of the British pound, euro or yen. Some of the examples are EUR/GBP, EUR/AUD, GBP/JPY, NZD/JPY and GBP/CAD.
  • Exotic currency pairs
    Exotic currency pairs usually include a currency from an emerging market country. They are typically illiquid, with fewer market-makers and much wider spreads. Examples of exotic currency pairings include EUR/TRY, USD/HKD, NZD/SGD, GBP/ZAR, NOK/RUB and AUD/MXN.

Why is the forex market important to traders?

The foreign exchange market is the biggest financial market in the world, with a daily turnover of around $6.6trn. The figure’s approximate break-down is as follows:

What is currency trading?

One of the key factors that differentiates currency trading from other types of trading is its exceptional liquidity. Moreover, it is also the largest market in the world in terms of trading volume, followed by the credit market. The sheer volume of currency trading that occurs in a day can make FX markets extremely volatile – and it is this volatility that makes it so appealing to traders. Volatility allows for higher profits but also increases the risks.

One of the key factors that differentiates currency trading from other types of trading is its exceptional liquidity. Moreover, it is also the largest market in the world in terms of trading volume, followed by the credit market. The sheer volume of currency trading that occurs in a day can make FX markets extremely volatile – and it is this volatility that makes it so appealing to traders. Volatility allows for higher profits but also increases the risks.

What hours of the day can you trade currencies?

Forex market activities are conducted across various networks in several markets around the globe; there is no one centralised place to trade currency pairs. Consequently, the market is run by a network of banks working across four different time zones (namely London, New York, Sydney and Tokyo). This allows traders to trade 24 hours a day.

The market is open 24 hours a day from 17:00 (EST) on Sunday until 16:00 (EST) on Friday. The international scope of the FX markets means that there are always traders making and meeting demands for a particular currency.

Forex Strategies

Historically, the forex market has three peak trading sessions; this is known as the forex three session system. These sessions consist of the North American (New York), European (London) and Asian (Tokyo) sessions. The forex markets are most active when these financial centres are conducting business and their stock markets are open. Sydney stock market hours also affect the Asian trading session. When these sessions overlap there are particular movements in currency pairs that are affected by both open regions. For instance, when the European and American sessions overlap, currency pairs such as EUR/USD and GBP/USD are particularly volatile.

Local time BST (GMT +1) EDT
Sydney open – 07:00
Sydney close – 16:00
22:00 – 07:00 17:00 – 02:00
Tokyo open – 09:00
Tokyo close – 18:00
01:00 – 10:00 20:00 – 05:00
London open – 08:00
London close – 16:30
08:00 – 16:30 03:00 – 11:30
New York open – 08:00
New York close – 17:00
13:00 – 10:00 08:00 – 17:00

August-Winter peak sessions

Local time GMT EST
Sydney open – 07:00
Sydney close – 16:00
20:00 – 05:00 15:00 – 00:00
Tokyo open – 09:00
Tokyo close – 18:00
00:00 – 09:00 19:00 – 04:00
London open – 08:00
London close – 16:30
08:00 – 16:30 03:00 – 11:30
New York open – 08:00
New York close – 17:00
13:00 – 22:00 08:00 – 17:00

 

How to trade forex CFDs

Since currency trading does not take place on a centralised exchange but on the OTC market, there are two most popular ways an individual can choose to trade forex: either through a spot market or through CFDs.

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Advantages of trading forex CFDs

  • Leverage. Leverage can make your wins go even further. You can trade CFDs on margin, meaning you can gain greater exposure for your initial capital. This is done by putting up only a fraction of the value of a trade and essentially borrowing the rest from your broker. This is known as leveraged trading and can amplify your wins as well as your risk.
  • Hedging. Hedging is the technique where someone opens a position to offset any potential loss that their current holdings may incur. The forex market is particularly volatile, which is what attracts a lot of traders. However, some may still want to employ hedging techniques to mitigate loss. Traders can take positions in markets that are negatively correlated, such as holding a long position on USD/CHF to hedge against falling oil prices.
  • Tax-efficiency. CFDs are exempt from stamp duty and losses can be offset against profits in other holdings that contribute to your capital gains tax liability. This is particularly useful when using CFDs to hegde.

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