Currency trading, also known as Foreign Exchange, Forex, or FX, refers to the act of trading one country's currency into another country's currency at the existing or set exchange rate.
How do you trade Currencies?
Currencies are traded in lots. Each lot is designated a different amount of currency. However, in order for an investor to participate in currency trading, lots are not bought. Instead, a margin account needs to be opened to allow a trader to buy and sell lots.
An investor may choose to trade Spot or Futures currencies or both. Each currency trading type has its own set of terms, conditions and designed purpose.
Currency trading in the Spot market
The spot market is a network of the largest financial institutions in the world such as central banks, commercial banks and other financial institutions, corporations and private investors, where foreign currency is bought and sold instantly. It is the single largest market and estimated at US$ 3 trillion a day.
Trading Currency in the spot market is possible 24 hour a day as the market works continuously all week, except Saturdays and Sundays.
The four largest foreign exchange centers in the world are London, New York, Tokyo and Singapore. Usually currency trading is brisk in North America mornings, i.e. afternoons in Europe due to both markets being open at the same time and due to new US economic data releases.
The foreign exchange markets trade a very wide range of currencies on a regular basis. However, the majority of transactions are made in five major currencies: the US Dollar, the Euro, the British Pound, the Japanese Yen and the Swiss Franc. The greatest number of spot currency trades is made against the US Dollar.
Currency trading in the Futures market
Currency trading in the futures market is contract to buy or sell a specified amount of a given currency at a predetermined price on a set date in the future. All forex futures are written with a specific termination date, at which point delivery of the currency must occur unless an offsetting trade is made on the initial position.
Futures serve two primary purposes as financial instruments. First, they can be used by companies or sole proprietors to remove the exchange-rate risk inherent in cross-border transactions. Second, they can be used by investors to speculate and profit from currency exchange-rate fluctuations.