The Process of Currency Trading

By: Paul Bryan
The existing foreign exchange, forex, or currency trading market is worth of nearly $2 trillion of transaction daily. This is, unquestionably, the largest and most lucrative financial market to lure any investor.

The processes of currency exchange to take place, a robust, proven, and efficient infrastructure is required that will rapidly process the huge volume of orders, receipts, and carry away all other assorted computational tasks. There are innumerable types of parameter working together and influencing the global trading process.

The logistics behind modern currency exchange has evolved over several centuries and mostly driven by a series of conventions. Thanks to advances in modern technology, the process of exchanging currency has progressed from a slow, cumbersome, paper-based effort into a dynamic, computer-driven marketplace. It has opened up to the small and medium level investors with increasing potential and complexities.

There are approximately 164 different global currencies that are traded. The majority of transactions involve a small subset of this group. The most popular are USD (United States dollar); EUR (European Union euro); GBP (Great Britain pound); and JPY (Japanese yen).

The global market is virtual and open round the clock.

Most trades take place on cash market, where prices are quoted in "pips," which is the last significant decimal of the given exchange rate. Because the number of decimal places varies by currency, knowing the typical exchange rates for major currencies can help in avoiding confusion. An exchange rate of 1.1582 is quoted either as 82 for small figures or as 15 for large figures.

The two types of trades on the cash market are the spot market and the forward market. In spot trades, the transactions are considered to be immediate, as it must close within 2 days after the trade is matched. In the forward market, the transaction closes any time beyond 2 days. It can be several months but you must remember that the longer the close, the greater the risk of a currency fluctuation.

One extremely important concept for the process of currency trading is the bid and the quote prices. Bid is the price offered by a buyer. Quote or ask or offer is a price placed by a seller. The difference between these two prices is known as the spread, and it is quoted in pips.

When the buyer and seller agree on the transaction, a trade is executed, and currencies are exchanged. This exchange not a physical one but involves a series of accounting entries made by the two parties, which is recorded as the new positions.

Every process of currency trading involves two elements: buying one currency; and simultaneously selling another currency. So it is buying cheap and selling dearer that ensures a profit.

So you will have to consider the constantly fluctuating exchange rates to book a profit. But never underestimate the potential of a risk management feature that can save you from losing your investment in the process of currency trading.

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