How Does Currency Trading Work? (For Beginners)

  • By: Joseph Benson
  • Time to read: 6 min.

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How does currency trading work? This article will change your perspective and most likely prompt questions. In the previous article, we discussed what a forex is, the term for what a forex is, and how currency trading works. 

How does currency trading work?

Currency trading is the same as forex trading! Well, let me throw more light on it. Other people understand it to be forex trading, while some understand it to be currency trading. Well, to be honest, it all means the same.

Currency trading is when you exchange one currency for another to make profits. The currency pair consists of two different currencies from two different countries. If you buy one currency, you are automatically selling the other currency.

The pair is the reason we make money trading Forex. Without the currency pair, no trading will take place in the world of forex. We all love to make money through forex trading, right?

But first, learn everything you need to know about forex, lot sizes, risk management, support and resistance, how to place take profit and stop loss orders, and much more. 

READ  Learning How to Trade Forex for Beginners | Case Study

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How Does Currency Trading Work?

What is currency trading?

Currency trading, just as I mentioned earlier, is buying one currency and selling the other for profit. Now let’s see how the currency pair works!

If you place a buy order on EURUSD, you are buying EUR and selling USD, and if you place a sell order on EURUSD, you are selling EUR and buying USD; this is how currency trading works. 

Is currency trading profitable?

If you ask me directly, I will say yes! Currency trading is highly profitable. Many new traders often ask this kind of question, and to be honest, it is profitable. We all love to make money by trading Forex.

And to be honest with you, before you can consistently trade Forex, you have to learn all the basics to know how the forex market works, when to cash-out, and when to take profits.

How do you make money from currency trading?

Foreign exchange allows investors to trade practically any currency on the globe (forex). to earn money in the currency market. You should be aware that you’re taking a chance on a speculative investment.

In other words, you’re wagering that the value of one currency will rise in relation to the value of another. The expected return on currency trading is similar to that of the money market, and it is less risky than investing in stocks or bonds.

Leverage, on the other hand, may be used to boost both rewards and risk. Active traders make more money than passive investors when it comes to currency trading.

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How Does Currency Trading Work?

Takeaways Important

  • When the value of foreign currencies rises and falls, it is possible to profit from trading them.
  • The trading of currencies is done in pairs.
  • Because of cheap trading expenses, a wide range of markets, and the availability of large leverage, buying and selling currency may be quite lucrative for active traders.
  • Currency exchange is not a smart technique for passive investors to profit.
  • Many huge brokerages and specialist forex brokers make it simple to get started trading money.

Explanation of Currency Buying and Selling

It’s crucial to remember that currencies are bought and sold in pairs. For example, you could have seen a currency quotation of 1.1256 for the EUR/USD pair. The euro is used as the foundation currency in this example. The quotation currency is the US dollar.

The base currency is worth one unit in all currency quotes. The quoted currency is the value of one unit of the base currency in terms of other currencies. Based on our last example, this means that you can buy 1.1256 US dollars with one euro.

In forex, an investor might profit from an increase in the quoted currency’s value or a reduction in the value of the base currency. Consider the stance an investor is taking on each currency pair for a different viewpoint on currency trading.

Because you are “selling” the base currency to buy the quoted currency, the base currency may be viewed as a short position. As a result, the quoted currency has a long position on the currency pair.

We can see from the example above that one euro may buy $1.1256 and vice versa. To purchase euros, the investor must first sell the US dollar and then buy the euro. To profit from this investment, the investor must sell the euros back when their value rises in relation to the US dollar.

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Consider the case when the euro’s value rises to $1.1266. If an investor sold a 100,000 euro lot at this exchange rate, they would profit by $100 ($112,660-$122,500).

On the other hand, the investor would lose $100 ($112,460-$122,500) if the EUR/USD exchange rate decreased from $1.1256 to $1.1246, on the other hand.

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How Does Currency Trading Work?

Benefits to Active Traders

For active traders, the currency market is a dream come true. The currency market is the world’s most liquid market. Commissions are often nothing, and bid-ask spreads are close to nil.

For several currency pairings, spreads of less than one pip are frequent. It is feasible to trade forex regularly without incurring hefty transaction expenses.

There is always a bull market somewhere in the currency market. The long-short nature of forex, as well as the variety of worldwide currencies and the poor or even negative correlation of many currencies with stock markets,

assures that trading opportunities are always available. During weak markets, there is no need to wait on the sidelines for years.

Although forex has a reputation for being dangerous, it is an excellent location to begin active trading. As long as you don’t employ leverage, currencies are less volatile than equities.

Because of the modest returns on passive investments in the FX market, it’s far more difficult to mistake a bull market for being a financial genius. You can earn money anywhere if you can make money in the FX market.

Finally, for experienced traders, the forex market provides access to significantly larger amounts of leverage. Regulation T puts very strict limits on how much leverage stock investors in the US can use.

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In the currency market, 50 to 1 leverage is common, with 400 to 1 leverage being achievable on rare occasions. One of the reasons for currency trading’s dangerous image is its high leverage.

Passive investors disadvantages

In the currency market, passive investors seldom earn money. The first reason is that, like the money market, the returns on passively holding foreign currencies are minimal. That makes sense when you think about it.

When Americans purchase euros on the FX market, they are really investing in the European Union’s money market. Money markets all around the globe, as well as currency markets, have poor projected returns.

For passive investors, the advantages of the currency market are frequently ineffective or even damaging. Low trading fees are meaningless if you don’t trade often.

When you use high leverage without a stop-loss order, you risk losing a lot of money. When an investor uses stop-loss orders, on the other hand, they become an active trader. 

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How Does Currency Trading Work?

What happens when trading currency?

When you said, “What happens when trading currency? is an excellent question, and the answer is that nothing much happens other than making consistent profits if you have the necessary knowledge and education on how forex works.

Forex which stands for “foreign exchange,” is a network of people who buy and sell currencies at a set price. It is the process by which people, businesses, and central banks change one currency into another; if you have ever traveled overseas, you have almost certainly done so.

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While some foreign exchange is done for practical reasons, the great majority of currency conversions are done in order to make a profit.

Because of the large volume of cash that is exchanged every day, certain currencies’ price changes may be quite erratic. This volatility is what makes foreign exchange so appealing to traders: it makes it possible to make more money but also makes it riskier.

Conclusion

Currency works by exchanging one currency for another to make money or profits, and if you are probably asking, is forex trading profitable? The answer to your question is yes. You can make good money trading forex if you learn the basics.

Want to get more value from me about forex in a video, with strategies and indicators? Subscribe to my YouTube channel. Joseph Benson Thank you so much. I am Joseph Benson.

Updated 29/10/2022

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