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Finance
» Currency Trading
What is Currency Trading?
How does the market place for currency trading operate?
Although no formal currency trading market exists similar to the vast international clearing houses that regulate the markets for stocks and options, the currency trading markets are able to function quite well.
Currency trading also known as FX trading is simply controlled by the use of credit agreements and self regulation. Also, credible retail dealers in the U.S. are members of the National Futures Association (NFA).
This organization provides its members with binding arbitration services. In essence, the currency trading market represents the largest and most liquid market in the world.
It literally trades 7 days per week on a 24 hour around the clock basis. The daily total U.S. $ volume of transactions amounts to approximately $2 trillion per day.
How to generate profits through currency trading?
Assuming that you are trading currencies for your own account, the simplest description of what you are doing can be viewed in the context of valuating 1 currency purchased or sold against another currency.
For example, if you believe that the value of the U.S. $ will decrease relative to the EURO, you would want to buy EUROS from the currency dealer at the highest rate possible relative to the U.S. $.
To illustrate, assume that you buy EUR 100,000 at an exchange rate of 1.8 EUROS to the U.S. $. In this example, you would need to give the currency dealer U.S. $55,555.55. Let us further assume that in 7 days, the value of the U.S. $ decreases relative to the EUR to an exchange rate of 1.5 EUROS.
This would mean that if you were to sell your EUROS back to the currency dealer at that rate, you would receive U.S. $66,666.66 for a realized profit of U.S. $11,111.11. Of course the exact opposite scenario would hold true if you believe that the U.S $ will be going up in value.
Aside from the U.S. $ and EURO, there are 6 major currencies that are generally traded. They are the Japanese Yen (JPY), Swiss Franc (CHF), Australian Dollar (AUD), British Pound (GPD), Canadian Dollar (CAN) and New Zealand Dollar (NZD).
How are commissions and fees recognized from currency trading?
Currency dealing companies are not brokers and as such they do not charge commissions. On the contrary, they are dealers who assume risks from inventory and trade initiation.
Aside from the profits derived from their own trading activities or strategies, they charge their customers a differential principal price known as basis points (bps) which are added to the acquisition or sales price of the particular foreign currency being dealt with. The basis points are expressed in terms of points to the base of 100 (i.e. 5 bps = 5/100).
The above explanations are meant to provide you with useful information and to define the role that currency trading plays within the financial markets.
Rate this Article : Current : 3/5
How does the market place for currency trading operate?
Although no formal currency trading market exists similar to the vast international clearing houses that regulate the markets for stocks and options, the currency trading markets are able to function quite well.
Currency trading also known as FX trading is simply controlled by the use of credit agreements and self regulation. Also, credible retail dealers in the U.S. are members of the National Futures Association (NFA).
This organization provides its members with binding arbitration services. In essence, the currency trading market represents the largest and most liquid market in the world.
It literally trades 7 days per week on a 24 hour around the clock basis. The daily total U.S. $ volume of transactions amounts to approximately $2 trillion per day.
How to generate profits through currency trading?
Assuming that you are trading currencies for your own account, the simplest description of what you are doing can be viewed in the context of valuating 1 currency purchased or sold against another currency.
For example, if you believe that the value of the U.S. $ will decrease relative to the EURO, you would want to buy EUROS from the currency dealer at the highest rate possible relative to the U.S. $.
To illustrate, assume that you buy EUR 100,000 at an exchange rate of 1.8 EUROS to the U.S. $. In this example, you would need to give the currency dealer U.S. $55,555.55. Let us further assume that in 7 days, the value of the U.S. $ decreases relative to the EUR to an exchange rate of 1.5 EUROS.
This would mean that if you were to sell your EUROS back to the currency dealer at that rate, you would receive U.S. $66,666.66 for a realized profit of U.S. $11,111.11. Of course the exact opposite scenario would hold true if you believe that the U.S $ will be going up in value.
Aside from the U.S. $ and EURO, there are 6 major currencies that are generally traded. They are the Japanese Yen (JPY), Swiss Franc (CHF), Australian Dollar (AUD), British Pound (GPD), Canadian Dollar (CAN) and New Zealand Dollar (NZD).
How are commissions and fees recognized from currency trading?
Currency dealing companies are not brokers and as such they do not charge commissions. On the contrary, they are dealers who assume risks from inventory and trade initiation.
Aside from the profits derived from their own trading activities or strategies, they charge their customers a differential principal price known as basis points (bps) which are added to the acquisition or sales price of the particular foreign currency being dealt with. The basis points are expressed in terms of points to the base of 100 (i.e. 5 bps = 5/100).
The above explanations are meant to provide you with useful information and to define the role that currency trading plays within the financial markets.
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