What is trading currencies good for?
At first glance, the whole concept of trading one currency for another might seem confusing or downright pointless; but it makes perfect sense once you get to know the details. Let me illustrate the problem through a hypothetical example.
Let’s say that in the beginning of 2011, a thousand AUD was worth one thousand and one hundred USD and by the end of the year, thanks to the strong Australian economy, one thousand AUD is going to be worth one thousand and two hundred USD. That would mean that if someone bough one thousand AUD in the beginning of 2011, he or she could trade it for one thousand and two hundred USD at the end of the year, making himself or herself a $100 profit. That’s how Forex trading can become profitable.
Where does Forex trading happen?
Naturally, in order to trade currencies, a market is definitely needed. In the case of Forex trading, the market is provided by a broker or market maker. An interesting thing about this aspect of Forex trading is that there isn’t a central place where foreign exchanges happen.
All transactions are conducted electronically via computer networks, between traders who can be working from anywhere in the world. This kind of currency trading is called over-the-counter or OTC, meaning that the currencies are traded through a whole dealer network, contrary to a centralized exchange.
You may find fascinating that the Forex trading market is the largest financial market in the world with its 4 trillion USD per day trade volume. Yes, that means that even the New York Stock Exchange falls short compared to the FX market (that’s a huge accomplishment, even if we consider that that 4 trillion dollars refer to the global foreign exchange market).
Thanks to its global volume, the Forex market is basically never closed; it operates 24 hours a day and five and a half days a week, all over the world.
You may be wondering what determines whether one currency beats the other or not. There are many factors that are taken into consideration when calculating any single currency’s worth… The price is mainly calculated by comparing supply and demand numbers, economic performance, political situations with future predictions and speculations of one country’s currency against another one.
The most popular currencies in the Forex market include US Dollar, yen, Euro, AUD, British Pound and Swiss Franc. In fact, almost 90 percent of all exchanges happen between a combination of these currency pairs.
Another interesting fact about FX trading is that you don’t have to be an expert in order to succeed at it. While it’s obviously better to have some education in the field, many programs and even software have been invented to help the average person make good decisions. Some of these special software trade currencies automatically, without the trader having to do anything.
You may have noticed that in order for one person to gain in the Forex market another one has to lose. For example if someone gains because the Euro becomes stronger against the US Dollar, someone who counted on the USD is going to lose his money.
And that’s why trading Forex is not an ideal way of making money for the average Joe. Income is never guaranteed when trading the stock market and it’s not different in the case of Forex. If you want to be a responsible father or mother, you shouldn’t rely entirely on foreign exchanges.
That’s not to say you should stay away from trading at all, but it’s always wise to take the necessary precautions and be prepared for the worst case scenario. To sum it up, you can experiment with Forex trading as long as you don’t risk the survival of you or your family.