Currency trading’s somewhat glamorous image leads many to incorrectly assume that the foreign exchange market is closed to all but the rich and daring. In reality, though, it only takes a few hundred dollars to access this highly liquid $1.9 trillion market. Success as a currency trader does take dedication to studying the market, but there’s no shortage of material to help beginning currency traders get off to a profitable start. Learn the basics of how traders earn from this market and decide for yourself if currency trading is right for you.
If you think of foreign currency trading as an expensive hobby reserved for millionaires with nerves of steel, you’re in for a pleasant surprise. Naturally, there are risks involved in currency trading, but there are also reliable ways to manage those risks. As for investment capital, although not too long ago currency trading did require a large investment, these days it’s possible to start trading with as little as $250.
How the Foreign Exchange Market Works
Currency trading is done on the foreign exchange market, also called the "forex" or "FX" market. On this market, the currency of one country can be exchanged for that of another. This enables, for example, the government of England to sell products to the US and receive British pounds in exchange for US dollars. The four most-commonly traded currency pairs are US dollar/Japanese yen, US dollar/Swiss franc, British pound/US dollar and Euro/US dollar. While most trading is done by governments, export and import companies, brokers who work with foreign assets, and financial institutions, the market’s daily trading volume of some $1.9 trillion dollars offers plenty of room for private investors, too. Private investors in the forex market profit by judging whether the exchange rate between two currencies will increase or decrease and then buying or selling accordingly. Foreign exchange price quotes include a "bid" (buy) and "ask" (sell) price. The difference between the bid and ask is called the "spread" and is where the trader’s profit or loss lies. For trading purposes, currency prices are usually quoted to four decimal places with the last decimal place being known as a "pip" or "point." It's this last decimal place that traders watch.