Currency trading refers to buying and selling currency with the intention of making a profit. These trades take place in the foreign exchange market, also known as the forex market. Trading currency differs greatly from trading stocks or making other investments.

Reasons to Trade

Unlike the stock market, the foreign exchange market operates 24 hours per day. Major market activity occurs in Tokyo, London and New York, allowing traders to buy and sell at any time of day. Trading currency requires a small initial investment, making this type of trading accessible to those without large investment accounts. Some firms do not charge commissions for currency trading, resulting in reduced expenses for traders. For those who have difficulty picking from the thousands of stocks available on the NYSE and NASDAQ, foreign currency trading allows traders to focus on just a few options.

Regulation

Currency trading occurs in an open market that has no central government oversight. Members of the market trade with each other by creating credit agreements, so no clearinghouse backs the trades. This market also lacks an arbitration panel to resolve trading disputes.

Traded Currencies

Four major pairs of currencies trade on the foreign exchange market, although some dealers trade less common currencies. The four major pairs are the euro/dollar (EUR/USD), British pound/dollar (GBP/USD), dollar/Japanese yen (USD/JPY) and dollar/Swiss franc (USD/CHF). There are also three commodity pairs traded on the foreign exchange market. They are the New Zealand dollar/dollar (NZD/USD), Australian dollar/dollar (AUD/USD) and dollar/Canadian dollar (USD/CAD).

Currency Nicknames

Just like other financial markets, the foreign exchange market has its own special terminology. Traders refer to the U.S. dollar as bucks and greenbacks. Swissie, Kiwi, Aussi and Loonie refer to the currencies of Switzerland, New Zealand, Australia and Canada, respectively. Nicknames for the British pound include sterling, cable and pound.

Brokers vs. Dealers

Stock market brokers act as agents for investors and execute transactions per investor orders. The broker takes a commission for this service. The foreign exchange market has dealers instead of brokers, eliminating the need for commissions. Unlike brokers, foreign exchange dealers assume some of the risk of trading foreign currency.

Forex Risks