Currency trading

Currency trading started in the 1970s after the transition to the model of floating exchange rates adopted after the conclusion of the International Monetary Fund conference in Jamaica in January 1976. Theretofore, the exchange rates of national currencies were fixed by the government. Central banks of countries maintained the exchange rates of national currencies on the same level with the help of intervention allowing their changes only through devaluation and revaluation.

Currency markets, where takes place the process of exchange of one currency for another one, were formed due to the transition to floating exchange rates. The largest and most popular currency market is Forex. The participants of the Forex market are central banks of countries, commercial banks, hedge funds, investment and insurance companies, brokerage and dealer companies, etc.

The constant changes in the value of one currency or another based on their demand and supply are the basis for speculations on various currencies. Currency trading on the Forex market by individuals for the purpose of making money from the difference between Ask and Bid prices is carried out through intermediaries – brokerage and dealer companies.

Currency pairs

The main instruments of trading on the Forex market are currency pairs, where the first currency is considered to be a commodity and the second one - money. For example, if you decide to trade EURUSD, then for the purchase of euro, you will pay in dollars.

The US dollars and one of the major convertible currencies are presented in the most popular currency pairs:

EURUSD (euro/US dollar);
USDJPY (US dollar/Japanese yen);
GBPUSD (British pound/US dollar);
USDCHF (US dollar /Swiss franc);
USD/CAD (US dollar/Canadian dollar);
AUD/USD (Australian dollar/US dollar);
NZD/USD (New Zealand dollar/US dollar).

These currency pairs together with cross-pairs (currency pairs without the US dollar, for example, EURGBP, EURJPY, GBPNZD, etc.) form the group of majors on the Forex market. Major currency pairs are considered to be the most liquid instruments, moreover, they also have high volatility, which allows to generate good cash of flow from trading.

Less liquid currency pairs, which are composed of the world’s main currencies paired with less liquid currencies are called minors, for example, EURHKD, EURSEK, USDHKD, USDNOK, USDSGD, and others.

Besides, the above listed pairs there also exist exotic currency pairs, the combinations of which are composed of one of the main currencies and a currency of the country with moderately developed or developing economy (for example, Czech crown, Polish zloty, Danish krone, Turkish lira, etc.).

The value of currencies of different countries depends on many factors, but the main ones are the state of the economy and political events in the country. These factors are the basis of the fundamental analysis of currency quotations. In the economy of each country take place important events, which indispensably influence the rate of the national currency. For example, the announcement of the European Central Bank interest rate immediately affects the rate of the euro which may lead to very high volatility in the market.

Besides fundamental analysis, there also exists technical analysis, which is based on the emergence of trends, support and resistance levels on the charts of currency pairs.

In order to start trading on the Foreign Exchange market, one needs a computer, an internet connection, initial capital and a right choice of the brokerage company. For successful trading on the Forex market, it is necessary to have fundamental knowledge about financial markets and trading experience.