Currency trading is more commonly known as Forex trading, where Forex stands for Foreign Exchange. The forex trading market is the largest trading market in the world; its daily turnover surpasses trading in stocks by a huge margin. According to estimates by Bank of International Settlements, the forex market traded more than $4.9 trillion every day for the month of August 2012. And when they say Trillion, they actually mean trillion. There is a lot of money that is involved in forex trading, which makes it an ideal market for any trader.
Trading in Currencies
Trading in currencies is different than trading in stocks or commodities in one important respect. In currency trading, you are not buying any commodity or object. Rather, you are exchanging one currency for another and due to exchange rates the values differ. Such a transaction becomes profitable when the currency you bought increases in value against the currency that you sold. Since there are more than a dozen world currencies that can be traded with each other, there are a number of possibilities when you want to trade in currencies. You can conceivably trade the USD against the Yen, Euro (EUR), Indian Rupee (INR) or the Canadian Dollar (CAD), or against any other currency. One can easily see that there are dozens of such pairings possible.
How Prices are Quoted in Currency Trading
Just as stock prices are quoted on a per share basis, prices in the currency market are quoted based on a unit of currency. When we want to express the value of a currency in the form of another currency, there are two ways to do so. One is to use the former currency as a base currency. For example, when we say that one USD is equal to 54 Indian Rupees (INR), we are using the USD as the base currency. Such a combination is expressed as USD/INR. One can use this fact when looking up currencies – for example, the Google Finance page that shows the value of one USD in terms of INR is called google.com/finance?q=USDINR. In such a currency pair, the currency on the left is called the base currency, and the one on the right is called the counter or quote currency.
The USD is the most common currency used when prices are quoted for the different currencies. However, sometimes prices are quoted without the use of the USD, such as when the British Pound (GBP) may be quoted against the Euro (EUR). In that case, this pairing would be represented as GBP/EUR, and such a pairing is called a cross currency quote.
How to Trade in FOREX
Just as one needs a stock trading account to trade in stocks, we also need to open a forex trading account to trade in forex. Forex trading account is usually different than stock trading account because the fees and commissions involved in forex trading are much different than those in regular brokerage accounts. Once you have opened an account, you can easily trade in currency pairs, or use more advanced instruments such as derivatives that are used to track the value of currency pairs. Many principles of stock trading, such as stop/loss orders, leverage, futures contracts, are applicable in forex trading too. Making a forex trading account is simpler than opening a bank account, so you should definitely open one and start trading after doing thorough research on this topic.