Currency trading is the name of the game right now. Currency trading is being called the Recession Proof Business of the 21st Century. The currency market is the crossroads for international capital, the intersection through which the global commercial and investment flows have to move. We like to think of the currency market as the, Big Kahuna of the financial markets. Currency Market is the most traded financial markets in the world.
Currency market is open around the clock six days a week, enabling currency traders to act on news and events as they happen. More than anything else, the currency market is the traders market. Its a market where a billion dollar of trades can be executed in a matter of seconds. Huge currency transactions may not even move the prices noticeably.
By far the vast majority of currency trading volume is based on speculation. Most of the people dabble in currency for pure speculation. It is the lure of making quick capital gains that attract most of the investors towards currency trading. While commercial and financial transactions in the currency markets represent huge nominal sums, they still pale in comparison to the amount spend on speculation.
Estimates are that upwards of 90% of the daily trading volume is derived from speculation meaning that commercial or investment based currency trades account for less than 10% of the daily global volume. The depth and breadth of the speculative market means that the liquidity of the overall currency market is unparalleled among global financial markets.
The biggest mental hurdle facing newcomers to currency trading especially those traders coming from other markets are getting there head around the idea that each currency trade consists of a simultaneous sale and purchase. The mechanics and terminology may take some getting used to if you are new to currency trading. Just like any financial market Currency trading has its own set of trading lingo.
For example, suppose you invest in the stock market by purchasing stocks. Suppose you purchase 100 shares of Google stocks (GOOG). So you own only 100 shares. You want to see the price go up as you have purchased 100 shares of Google (GOOG) for capital gains. You simply sell your 100 shares when you want to exit. Your decision may be based on capital gain or capital loss. But in currencies, the purchase of one currency involves the simultaneous sale of another currency.
This is the exchange in the foreign exchange. So currencies come in pairs. To make matters easier, currency markets refer to trading currencies by pairs. All most all currency pairs have nicknames or abbreviations. The major currency pairs all involve the US Dollar on one side of the deal.
The most frequently traded currency pairs in the currency market are: USD/JPY, GBP/USD, USD/CHF, EUR/USD, USD/CAD, UAD/USD, and NZD/USD. Rest of the currency pairs dont have the volume that these pairs have. The designation of each currency is expressed using ISO codes for each currency.
Although the vast majority of currency trading takes place in the dollar pairs, cross currency pairs serve as the alternative to always trading the US Dollar. A cross currency pair or a cross is any currency pair that does not include the US Dollar. Cross rates are derived from the respective USD pairs but are quoted independently.