Currency trading

Currency trading basics

Currency trading is a global market in which international currencies are traded around the clock. Another name for currency trading is foreign exchange or Forex for short. Currency markets can be quite volatile providing both opportunity and risk for Forex traders. The key to successful trading is buying currencies when they are undervalued and selling them at the right time to maximise gains or to cut losses.

How currencies are valued

The markets set the value of currencies according to the laws of supply and demand. If Forex traders are buying up Australian dollars and the supply is not meeting the demand, then the value of the Australian dollar will rise. However, if there are too many Australian dollars on the market and not enough demand, then the value will drop.

However, in most cases, one has to watch the value of a specific currency in comparison to another currency. For example, the Australian dollar may be rising against the Euro but dropping against the US dollar.

A wide range of factors can influence the value of any currency during a specific period. For example, the political and economic situation of the country in question is very important in predicting trends for a currency. Generally, if a country is politically unstable, the currency will drop because investors lose confidence in the ability of the nation to defend the value of the currency. Likewise, if a country is having economic difficulties, the currency is usually under downward pressure.

In many cases, countries experiencing tough economic times will try schemes to print more money flooding the market with their currency. Again, when there is too much of one currency on the market, the price tends to drop in value in relation to other countries.

Another important factor in currency valuation is the group behaviour of Forex traders. Many analysts refer to this behaviour as 'herd mentality'. Some currency traders pay close attention to graphs and charts that are thought to show trends in market behaviour. For example, traders may 'panic' when a currency suddenly starts losing value. Sometimes the exact reasons for the drop are not known, or at least are not agreed upon by experts, but traders are mainly interested in not holding on to a plummeting currency.

Successful currency trading

Generally, the idea is to buy one currency with another currency when the first currency is considered undervalued against the second. The Forex trader must believe there is some trend that will cause the purchased currency to rise sometime in the future against the currency used to make the purchase.

Many traders use automated software that looks for certain benchmarks and other clues before generating buy or sell signals. Those who have experience at Forex trading may invest in large numbers of currencies that they trade on a daily basis.

As noted, the currency market is highly volatile and investors must be constantly aware of fluctuations and the types of events that can impact the market. Generally, currency investment is not a long-term strategy, but is more suited for those who are willing to actively trade on regular basis.

The US dollar is the most important currency in the Forex markets because it is the primary reserve currency used internationally. Many countries have large US dollar reserves because oil is traded on the international markets mainly in this currency. For this reason, investors often look at the US dollar as a safe haven because so many countries have a stake in keeping the currency stable.

Trading currencies online

The volatile nature of the Forex markets is highly suited to online trading in which the investor can continuously scan the financial headlines and make trades quickly at any time of the day. Some software programs are even designed to automatically buy or sell currencies when certain conditions are met. Such robotic software monitors fluctuations on international markets on a 24/7 basis.