This article will discuss frequently asked questions about currency trading; otherwise known as Forex trading. This is by no means an exhaustive article about every FAQ relevant to Forex trading. Rather, its goal is to present the same in a way that will spark the interest of readers.
What is Currency Trading?
Forex trading is a decentralized market that takes advantage of the difference in value of one currency as against another. Simply put currencies are bought or kept until the price has reached a peak, or is at least higher than its purchase price and then converted into another currency.
How is Currency Trading Different from the Stock Exchange?
There are a lot of differences; however the main difference is the fact that as a general rule Forex deals with currencies while the Stock Exchange deals with shares of stocks, bonds, debentures and other derivatives. A second difference is the fact that the former is decentralized or not regulated by a central national and/or global entity while the former is regulated by domestic securities and exchange commission’s that follow a central regulating agency or trading floor. Third, is that Forex does not have dispute procedures, governing bodies and/or clearing houses.
Where is the Profit in Currency Trading?
The answer depends on the type of player you are. If you are a Forex trader then you get paid via your regular salary and commissions on every bit of profit you make for your client and/or firm. If you are a broker then you are paid by way of commission via the listings that you provide to traders and moonlighters. If you are an ordinary investor then you gain profits by buying and selling currencies in that you buy at a specific rate and sell when the same is higher or at its optimum rate , or sell when the currencies you have on hand has increased in value vis-a-vis the price when you bought the same.
Do You Mean You Need to Have Cash on Hand?
The simple answer is no, you do not need to have the currency on hand and then physically exchange it with another currency. This is because Forex trading is “speculative” in that the money only changes hands after the trade has been perfected. Of course, this presupposes that any requirements as to bonds are met by the trader. And of course, this does not preclude local or small time Forex trading that actually involves the physical exchange of currencies.
What are Currency Pairs?
These are specific currencies the value of which is compared with another currency. This includes but is not limited to:
- Major currency pairs that comprise of the most sought after and traded currencies
- EUR/USD (Euro/US Dollar)
- GBP/USD (British Pound/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- USD/CHF (US Dollar/Swiss Franc)
- Commodity pairs composed of countries whose currency depends highly on specific and sought after commodities:
- AUD/USD (Australian Dollar/US Dollar)
- NZD/USD (New Zealand Dollar/US Dollar)
- USD/CAD (US Dollar/Canadian Dollar)
- Exotic pairs composed of currencies that are relatively unknown – not because of the low level of exchange (which is not always the case). Rather, it is because of the vagueness of the currency or the country behind the same (i.e. USD/PhP [US Dollar/Philippine Peso]).