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What is Currency Trading?

Currency Trading in foreign exchange is the simultaneous buying of one currency and selling of another currency. Daily volume in the currency market exceeds US$1.5 trillion per day, making it the largest and most liquid market in the world. Unlike other financial markets, the Forex market has no physical location or central exchange. It is an over-the-counter market where buyers and sellers including banks, corporations, and private investors conduct business. Foreign exchange trading takes place in financial trading centers all over the world, including New York, London, and Tokyo creating one cohesive, international market. The huge number and diversity of traders involved make it difficult for even governments to control the direction of the market. The unmatched liquidity and around-the-clock global activity make foreign exchange the ideal market for active traders.

The foreign exchange market has experienced many changes since its inception. For years, the United States and its allies, under the Bretton Woods Agreement, participated in a system in which exchange rates were tied to the amount of gold reserves belonging to the nation. However in the summer of 1971, President Nixon took the United States off the gold standard, and floating exchange rates began to materialize. Today, supply and demand for a particular currency, or its relative value, is the driving factor in determining exchange rates. Decreasing obstacles and increasing opportunities, such as the fall of communism and the dramatic growth of the Asian and Latin American economies have created new opportunities for investors. Traditionally the foreign exchange market was only available to larger entities trading currencies for commercial and investment purposes through banks. Now trading platforms, such as our Trading Station, allow smaller financial institutions and retail investors access to a large pool of liquidity and competitive rates.

Increasing trade and foreign investment have made the economies of all nations more and more interrelated. Regularly reported economic figures around the world, such as inflation or unemployment levels, as well as unexpected news, such as natural disasters or political instability, alters the desirability of holding a particular currency, thus influencing international supply and demand for that currency. The U.S. Dollar, therefore, fluctuates constantly against the currencies of the rest of the world. The current web of international trade and the resultant fluctuations in exchange rates have created the world's largest market — the foreign exchange market, a market whose vast size makes it what we consider to be the most efficient, fairest, and liquid of all markets.

The foreign exchange market is a cash interbank or interdealer market. The market is both highly differentiated from, yet intrinsically linked to, the currency futures market. Foreign exchange, however, is not a "market" in the traditional sense since there is no centralized location for trading activity. Trading occurs over the telephone and through computer terminals at thousands of locations worldwide. The direct interbank market consists of dealers with currency settlement capabilities trading as principals. It is this dealer segment of the market that is responsible for generating a large portion of the overall foreign exchange volumes. Trading between dealers creates the largest turnover in the market, making foreign exchange the most liquid of all markets.

Trading approximately US$1.5 trillion every day, the foreign exchange market is the largest financial market in the world. Traditionally, the foreign exchange market has only been available to banks, money managers, and large financial institutions. Over the years, these institutions, including the U.S. Federal Reserve Bank, have realized large gains via currency trading. This growing market is now linked to a worldwide network of currency traders, including banks, central banks, brokers, and customers, such as importers and exporters. Today, the foreign exchange market offers opportunities not only to banks and institutions, but to individual investors as well.

Currency trading involves high risk and you can lose a lot of money.

» Next: So, why should you trade?

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