How to Trade Currencies Online

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What is trading currency? Currency trading, also known as forex trading, refers to the buying and selling of currencies on the foreign exchange market. Currencies are traded in pairs, and each currency has its own value relative to another.

For example, one U.S. dollar might be worth 0.75 British pounds. When forex trading, traders seek to profit from fluctuations in the exchange rate between two different currencies. To do this, they buy and sell currency pairs, speculating whether the exchange rate will rise or fall.

Forex trading is a huge market, with a daily turnover of $6 trillion. It's also a highly volatile market, which can make it both risky and rewarding for traders. If you're thinking of getting into forex trading, there are a few things you should know. To help you out, we have compiled this comprehensive guide that will take you through everything you need to understand about currency trading before dipping your toes. We also have an indepth guide on how to start earning with forex trading.

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Currency Trading Pros

Currency trading has a number of pros that potential investors should be aware of before they dive into the market. Some of these include:

1. Low Starting Capital: The most appealing aspect of forex trading is that it can be done with a relatively small amount of capital. Some brokerages allow users to start with as little as $10.

2. Leverage: Currency trading typically occurs on margin. This means you can control large positions with relatively little money down. This leverage can work for or against you; it magnifies gains and losses.

3. Potential For Fast Returns: Currencies can move quickly, sometimes 100 pips or more in a day. This means there is potential for fast returns. Of course, you can also lose money just as quickly.

4. Accessibility: You can trade currency pairs online 24 hours a day, 5 days a week. This market is global, so you can trade on your own schedule.

5. Liquidity: The forex market is the most liquid market in the world. This means there's always someone willing to buy or sell a currency pair.

6. Fewer Fees And Commissions: brokerages typically charge lower fees and commissions than other types of firms. You can also trade commission-free with some firms.

Currency Trading Cons

Currency trading has several cons that potential investors should be aware of before they dive into the market. Some of these include:

1. Volatility: The currency markets are notoriously unstable, which can make it difficult to generate consistent profits. The market is so risky that about 80%of beginners lose money in their first year of trading. You need to be prepared for large swings in prices and be able to stomach some losses along the way.

2. Lighter Regulatory Protection: Currency traders do not have the same level of protection as other types of investors. For example, there is no guarantee that your broker will not go bankrupt and leave you out of pocket.

3. Fewer Residual Returns: Unlike stocks or shares, currency investments do not generate dividends or interest payments. This means that all profits must be generated through price movements, which can be very difficult to predict.

How Does Currency Trading Work?

Forex trading takes place 24 hours a day, 5 days a week, across three distinct sessions: The European, US, and Asian sessions.

Currencies are traded in pairs, with each currency being quoted against another. The first currency in a pair is the base currency, while the second is the quote currency. Currencies are always quoted in terms of the quote currency (the second currency in a pair). For example, if EUR/USD is quoted at 1.1000, that means one Euro is worth 1.10 US dollars.

The bid price is the price at which you can sell the base currency, while the ask price is the price at which you can buy it.

Understanding Pairs and Pips

Pairs and pips are two key concepts in currency trading. A pair is a combination of two currencies, for example, EUR/USD or USD/JPY. Pips refer to the smallest unit of price movement in a currency pair. For most pairs, one pip is equal to 0.0001 of the quoted currency. So, if EUR/USD moves from 1.1000 to 1.1001, that would be a move of one pip.

Pairs are typically quoted to four decimal places (0.0001), with the exception of JPY pairs, which are quoted to two decimal places (0.01). Pips are used to calculate profits and losses in Forex trading.

What To Trade on Forex

When it comes to forex trading, there are several different instruments you can trade. These include FX spot, currency-based CFDs, and currency futures and options. Each has its benefits and drawbacks, so it's important to understand the differences before deciding which one is right for you.

FX Spot

FX spot is the most straightforward kind of forex trade. You simply buy one currency and sell another, and the transaction is settled immediately. This makes it a good choice if you need to take advantage of market movements in the short term. However, it also means that you're exposed to currency risk. If the value of the currency you've bought falls, you'll make a loss.

Currency Based CFDs

Currency-based CFDs are a type of derivative product. This means that they allow you to speculate on the movement of currency pairs without actually owning the underlying currencies.

CFDs can be traded on margin, meaning you only need to put down a small deposit to open a position. This makes them a popular choice with traders looking to leverage their capital. However, it also means that losses can quickly mount up if the market moves against you.

Currency Futures and Options

Currency futures and options are two more types of derivative products. Futures contracts commit you to buying or selling a currency at a set price at some point in the future. Options give you the right but not the obligation to buy or sell a currency at a set price in the future. Both futures and options can be used as hedging tools, as well as being traded for profit. However, they can be complex instruments and may not be suitable for beginners.

As you can see, there are several different ways to trade forex. Whatever is right for you depends on your circumstances and objectives.

Currency Trading vs. Stock Trading

Currency trading and stock trading are two very different beasts. Here are some key differences between the two:

1. Exchange v/s OTC

Currency trading takes place on the foreign exchange market, also known as the forex. This is a decentralized market where all the world's currencies trade. The forex is an Over-The-Counter (OTC) market, which means there is no central exchange.

Instead, currency trading is conducted electronically over the counter. This makes the Forex market different from exchanges like the New York Stock Exchange, where trading is carried out through a central exchange.

2. 24-Hour Market

The Forex market is a true 24-hour market, starting each day in Sydney and ending in New York. This allows investors to trade forex any time of day or night. On the other hand, stock traders can only trade during regular business hours. For instance, the New York Stock Exchange (NYSE) is only open from 9:30 a.m. to 4 p.m. EST.

3. Cost of Entry

The cost of entry into currency trading is generally lower than for other markets like stocks or futures. This is because you can trade with leverage on the forex. Leverage allows you to control a large amount of currency with a relatively small amount of money. However, leverage can also work against you if the market moves against your position.

4. Difference in Spreads

Spreads are the difference between the bid and ask price of a currency pair. These can be as low as one or two pips on major currency pairs like EUR/USD. In comparison, spreads on stocks and futures can be much higher.

5. Market Manipulation

The foreign exchange market is less susceptible to manipulation than other markets, such as stocks or futures. This is because there are many different participants in the forex, including central banks, commercial banks, hedge funds, and retail investors. It would be very difficult for any one group to manipulate the market for their benefit.

What are the Best Currency Pairs to Trade?

When it comes to trading currency pairs, there are a few factors to consider. First of all, you want to make sure that you're choosing a liquid pair, meaning there is a lot of activity and turnover. This will help ensure that you're able to get in and out of trades quickly and at the price you want.

You also want to look for pairs that are relatively low-risk. That means choosing stable currencies and not prone to sudden swings in value.

What is a Currency Pair

A currency pair is the quotation of two different currencies against each other. For example, EUR/USD. This is known as a direct quotation. When USD is quoted first, it is called an indirect quotation.

All currency pairs have a bid price, and an ask price. The bid price is the price at which you can sell the base currency. The ask price is the price at which you can buy the base currency. The difference between the bid and ask prices is called the spread.

There are three main types of currency pairs: major pairs, minor pairs, and exotic pairs. Major currency pairs are the most traded in the world and include EUR/USD, USD/JPY, GBP/USD, and USD/CHF.

Minor currency pairs are less traded than major pairs and include any pair that includes the US Dollar but doesn't include the Euro or British Pound. Exotic currency pairs are any currency pair that doesn't include the US Dollar. These include currencies like the Mexican Peso or Turkish Lira.

Best Forex Pairs to trade

Here are some of the best currency pairs to trade, especially for beginners.

EUR/USD: This is the most popular currency pair in the world, and for good reason. The Euro and the US dollar are both major global currencies, so there is always a lot of interest and activity in this pair. It's also a relatively low-risk pair since both economies are fairly stable and account for a whopping 28% of the daily trading volume.

USD/JPY: This currency pair is often known as the "Yankee" and accounts for 13% of the daily trading volume. It's another very popular pair due largely to the fact that it offers fairly low risk. The US dollar is again a major global currency, while the Japanese yen is also quite stable. This pair can be a bit more volatile than EUR/USD, though, so keep that in mind.

GBP/USD: This pair is often known as "the cable," and it's one of the oldest currency pairs around, with about 11% of the daily trading volume. The British pound and the US dollar are both very strong currencies, making this an attractive choice for traders looking for liquidity. Like EUR/USD, it can be a bit volatile at times, but overall, it's a fairly low-risk pair.

AUD/USD: Known as the "Aussie," this pair accounts for 6% of the daily market trades. It's another popular currency pair that offers traders a good mix of liquidity and stability. The Australian dollar is a major commodity currency, while the US dollar is once again a major global currency. This pair can sometimes be influenced by movements in the commodities markets, though, so keep that in mind.

USD/CHF: This pair is often called the "Swissie" and is considered one of the less volatile currency pairs, with about 5% of the daily trading volume. The "Swissie" is considered a safe haven currency. As a result, it's often seen as a smart choice for conservative investors.

USD/CAD: This is the final major currency pair on our list, accounting for 5% of the daily global trades. The Canadian dollar is closely linked to commodity prices (particularly oil), while the US dollar is once again a major global player. This pair can be somewhat volatile due to these factors, but overall it's still considered relatively low risk.

Key Currency Trading Terms to Know

Forex refers to the trading of global currencies in an exchange market. The forex market is known to be the world’s most liquid financial market. As a trader, you will not only be dealing with currencies in pairs. It's important to know some other terminologies and their meanings.

Currency pairs are made up of a quote and a base currency which are separated by a forward slash (/) and displayed in abbreviated forms such as GBP/USD. In this case, the base currency is the British Pound and the quote currency is the US dollar.

The major currencies are those which are traded more often and they all have the US dollar as a part of the pair. These currencies include the US dollar, New Zealand dollar, Australian dollar, Japanese Yen, Swiss Franc, Canadian dollar, British Pound Sterling, and Euro.

Minor currencies, also known as cross-currency pairs, are those which don’t have the US dollar. Among the minors, the British Pound (GBP), Japanese Yen (JPY), and Euro (EUR) are the most traded currencies.

A pip refers to a small incremental move made by an exchange rate in the forex market.

Lots are the specific amounts of a currency pair being traded. They refer to the number of units of a currency a trader either buys or sells.

The ask price is the lowest price at which a seller is willing to buy a currency pair.

A bid refers to the highest price at which a buyer is willing to sell a currency pair.

The spread means the difference between the bid price and the ask price.

To open a long position means that the trader buys the base currency in a trade.

To open a short position means that the trader sells the base currency in a trade.

A margin is the amount of trading capital used to open and maintain trading positions.

Leverage allows traders to use very little money to get access to a relatively larger amount of trading funds which increases their potential of getting higher returns or making higher losses.

A swap is an interest paid to keep your trade running overnight.

The changes in currency prices are influenced by a wide range of political and economic factors such as the political situation of the country, inflation, interest rates, economic growth, government policy, etc.

Volatility measures how prices fluctuate within the specified timeframe. It is one tool used by traders to spot potential opportunities and manage their risk.

Key FX Trading Facts to Know

If you are currently doing research on the financial markets, then consider these 15 important facts and figures about forex.

1

The biggest financial market in the world is the forex market which is currently worth about $2.4 quadrillion.

2

The forex market has a daily turnover of $6.6 trillion according to data pulled from sources in 2019.

3

There are currently 170 different currencies being traded in the forex market.

4

85% of traders use MT4, making it the biggest trading platform. MT5 is the second-ranking platform that has 6% of traders using it.

5

The most popular currency in the forex market is the US dollar which powers more than 88% of trades worldwide. The Euro is the second-ranking currency, followed by the Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, and Swiss Franc in that order.

6

The forex market is always open 24/7 from 5 PM EST on Sunday to 4 PM EST on Friday. But the trading occurs across different marketplaces at different time zones in four major sessions (also called segments).

7

Currency pairs that get traded the most are classified as Majors. These currency pairs are 7 in number and all have the US dollar as a quote or a base. They include AUD/USD, USD/CAD, NZD/USD, USD/JPY EUR/USD, GBP/USD, USD/CHF.

8

More than 67% of the daily trading volume in the forex market involves the majors.

9

Currency pairs without the US dollar either as a quote or a base are classified as Minors. Some include EUR/NZD, EUR/GBP, GBP/JPY, GBP/AUD, CAD/JPY, etc.

10

The number of online forex traders around the globe is around 13.9 million. 3.1 million traders are based in Europe, with 1.6 million in North America and 4.6 million in Asia.

11

Every month, 9-20 trades are opened by 41% of traders on average.

12

14% of traders spend at least 6 hours on forex trading, while 45% spend anywhere from 1 to 2 hours trading online.

13

The biggest forex broker in the world is IC Markets based out of Australia. This broker records $18.9 billion in average trading volume every day.

14

Of all the forex traders, only 7% have actively traded for more than 10 years. 23% have traded for 4 to 9 years, 39% have traded for 1 to 3 years, and 31% have traded for less than 12 months.

15

No single exchange market controls the international forex trading scene. Rather, the forex market has brokers and exchanges interacting, and the active trading hours for the markets depend on the time zone. These timezones are always overlapping, so each region has its official trading session as follows: New York from 8 AM EST to 5 PM EST, Tokyo from 7 PM EST to 4 AM EST, Sydney from 4 PM EST to 1 AM EST, and London from 2 AM EST to 11 AM EST.

Key Types of Forex Trading Strategies

When it comes to Forex trading, there are many different strategies that can be employed. Some traders prefer to take a long-term approach, while others opt for a more short-term approach. Here is a brief overview of some of the most popular Forex trading strategies:

Short-Term Forex Strategies

Short-term forex strategies are generally made up of a few different components. First, traders will look at technical indicators to try and identify key support and resistance levels. They may also use Fibonacci levels or other types of price action analysis.

Next, traders will use this information to develop a trading plan that includes entries, exits, and stop losses. This type of strategy is often used by day traders or scalpers who are looking to take advantage of small moves in the market. While short-term forex strategies can be profitable, they also come with a higher level of risk.

Scalping

Scalping is a short-term trading strategy that involves taking small profits frequently. Scalpers aim to make a large number of trades each day, and they typically hold their positions for just a few minutes or even seconds.

This strategy can be quite risky, but it can also be very lucrative for those who are able to execute it successfully. It's best suited for active traders with the time and energy to closely monitor their positions.

Day Trading

Day trading is another short-term trading strategy, but it differs from scalping in that day traders typically hold their positions for a bit longer, usually for several hours or even all day.

Day traders also typically trade a wider range of assets than scalpers, and they may use different techniques, such as technical analysis, to try and predict future price movements. This strategy is best suited for those with a good understanding of the market and who have the time to watch the market closely throughout the day.

Swing Trading

Swing trading is a type of forex trading strategy that involves holding a position for a period of time, typically for one day to one week, and then selling the position. The goal of swing trading is to capture larger price movements than would be possible by simply buying and selling a currency pair on the same day.

Swing traders typically look for pairs in a defined trend, such as an uptrend or downtrend, and then hold the position until the trend changes direction. This type of trading can be challenging, as it requires patience and discipline to wait for the right opportunity to enter a trade. However, it can also be quite profitable, as it allows traders to take advantage of larger price movements.

Forex Investing

There are many different forex investing strategies that traders can use to try and capitalize on the global currency markets. Some of the more popular ones include:

Buying Forex Currencies for Long-Term

When buying a currency, the trader predicts that the value of that currency will appreciate against another currency. This is usually done to make a profit when the currencies are sold at a later date. For example, if a trader buys US dollars with British pounds, they expect the US dollar to increase in value relative to the British pound. If this happens, the trader can sell their US dollars for a profit.

Copy Trading

Copy trading is where a trader copies the trades of another more successful trader. This is often done through online platforms where traders can connect. By copying another trader's trades, the copy trader can learn from their success and improve their trading ability. Copy trading can be a great way to improve your forex trading skills without having to go through all the trial and error yourself.

PAMM Accounts

PAMM accounts are managed accounts that allow investors to pool their money together and entrust it to a professional trader. The advantage of this approach is that it can help to diversify risk and potentially increase returns. However, it is important to carefully research any trader before investing in a PAMM account. There are also some other managed account types that can be used, such as MAM accounts and LAMM accounts.

Top Currency Trading Tips For Beginners

Study Forex and how it works well

Forex trading doesn’t necessarily require an academic education in economics — however, traders need to obtain some basic knowledge about the functioning of the market before they launch their first trade.

At the very least, a trader needs to understand the basic trading strategies, industry-specific terms, risk diversification, forecasting methods, etc. Often enough, Forex brokers have basic training options that provide clients with some elementary education. The Traders Union Website also provides a plethora of information and guides for novice traders, along with a handy video guide.

Only invest what you can afford to risk

When funding your Forex trading account, it’s imperative not to invest more than you’re prepared to lose. In other words, any money that you deposit into the trading account must not be money you need for regular living expenses or other costs. Your trading money should exclusively be money that you’re prepared to lose in its entirety — and being psychologically prepared for this will also help you accept some inevitable losses along the way.

Start with a demo account first

Even if you’re prepared to lose all of the money you’re investing into Forex trading — that doesn’t mean you should start by risking it right away. Once you’ve learned all of the theoretical basics of Forex trading, start by putting your trading strategies to the test in practical market conditions. Many reputable brokers have options for “demo accounts” — where you can practice your trading in current, real-world conditions but with virtual funds. This gives you some much-needed time “on the ground” without risking your hard-earned capital.

Study passive income

Learning how to invest in Forex trading doesn’t necessarily mean you need to do the actual trading yourself. There are multiple avenues for investment — one of which is treating Forex as a passive income source rather than a job. In that case, you invest in a professional trader who will manage the trades for you.

The pros and cons of this approach are fairly obvious. On the one hand, you won’t need to learn the intricacies of the market, and you won’t need to actively spend time trading. On the other hand, you will have to share a percentage of your profits with the trader.

Consider the "slower" time frames first

One of the first decisions a trader makes is whether to make trades by observing slower or faster timeframes. While this is entirely a matter of personal preference for more experienced traders, it’s advisable to start with slower timeframes as a beginner.

This allows you to work in a less “choppy” environment, giving you more time to eventually correct any mistakes. Trying scalping as a beginner usually means losing all of your money in a matter of minutes — so start with daily charts, and start working towards profitability.

Increase risk and capital levels gradually

While you may be tempted to “go big” at first, you need to know the limits of your skills as a trader. In Forex, the key to your success in the long run won’t be a few big trades — it will be consistency. Everyone loses money, but the traders that consistently maintain a smaller positive edge usually come out on top. So, educate yourself, and increase your leverage and invested capital accordingly — be disciplined and patient, and don’t try to trade beyond your means.

How to Start Trading Currencies Online?

If you're interested in trading currencies online, there are a few things you need to do before you get started. Here is a step-by-step guide.

Test Your Trading Strategy

The first step is to test your trading strategy. There are many approaches to forex trading, and it's important to find an approach that suits your individual style and risk tolerance. The best way to do this is by paper trading. This means making simulated trades on a practice account without actually risking any money. This will allow you to perfect your strategy before putting any real money on the line.

Find Your Forex Brokers

When it comes to finding a forex broker, the most important thing is to make sure that you choose one that is trustworthy and offers good trading conditions. There are a lot of brokers out there, so it can be tricky to know who to choose.

One way to narrow down your options is to look at forex broker ratings. These ratings take into account factors such as fees, customer service, and the overall trading experience. At TU, we regularly update our forex broker rating to include only the most trusted brokers with the best trading conditions.

How to Choose a Forex Broker

Get Started with Currency Trading on Demo

In a demo account, you trade with virtual money in a real-time environment without putting any of your hard-earned cash at risk. Demo accounts are a great way to learn the basics of currency trading, explore different trading strategies, and test different platforms. Most importantly, a demo account will give you a chance to see if currency trading is right for you.

To get started with a demo account, simply find a reputable broker that offers this type of account and open an account. You’ll get to practice your trading strategies in real-time market conditions. When you feel ready, you can transition to a live account and start trading with currencies.

Apply for Trading Account Online

Once you find a broker you like, applying for a live account is pretty simple. All you have to do is fill out the online application form. The process is similar to opening a bank account. You'll need to provide personal information, like your name, address, and Social Security number. Once you've submitted the form, the broker will likely run a credit check.

If everything looks good, you should be approved for an account within a few days. After that, you'll just need to fund your account and start trading with currencies.

Fund Your Forex Trading Account

Funding your account is easy and only takes a few minutes. Most brokers offer multiple funding options, so you can choose the most convenient method. For example, you can fund your account with a credit or debit card, bank transfer, or e-wallet. Once your account is funded, you can start trading right away.

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Summary

In summary, foreign currency trading can be a lucrative way to earn money online. However, it is important to approach this type of investment with caution and knowledge. By understanding the risks and rewards associated with currency trading, you can put yourself in a position to make informed and profitable decisions. With a solid understanding of the market and a willingness to take some risks, you can make a substantial return on your investment.

FAQ

How do I start online trading currency?

The first step is to find a reputable. Once you have opened an account, fund it with the appropriate amount of money and select the currency pairs you want to trade.

What are the costs of trading currencies online?

Most brokers charge a commission on each trade, as well as a spread. The spread is the difference between the bid and ask price of a currency pair. For example, if the EUR/USD bid price is 1.2050 and the ask price is 1.2051, the spread would be 1 pip.

How risky is currency trading?

All investments carry risk, and forex trading is no different. The most important thing is to develop a risk management strategy that suits your personal risk tolerance. This might involve setting stop-loss orders, limit orders, or utilizing a hedging strategy.

What are the benefits of currency trading?

Currency trading can offer some advantages. For example, forex markets are open 24 hours a day from Sunday evening until Friday night, so you can trade when it suits you. Additionally, you can use leverage to increase your potential profits (or losses).

Team that worked on the article

Oleg Tkachenko
Author and expert at Traders Union

Oleg Tkachenko is an economist-analyst and a risk manager with a practical experience of working in financial institutions for over seven years. Oleg specializes in the analysis of commodities, Forex, stock markets and non-standard investment markets (cryptocurrency, hypes, peer-to-peer lending). He holds a Master’s Degree from the Ukrainian Academy of Banking of the National Bank of Ukraine, Kharkiv Banking Institute. Oleg became an author for Traders Union in 2018; in 2020 he joined the TU’s team of financial experts.

At Traders Union, Oleg is involved in expanded reviews of brokerage companies, and in monitoring the relevancy of the information provided in them. He analyzes trading strategies and indicators, and prepares educational articles on the topic of finance. In addition, Oleg carries out expert research in the Forex and stock markets, and also binary options and cryptocurrency markets. In particular, he checks brokerage companies, studies their performance and growth, tests new services offered by brokers, software and the level of customer support.

Oleg’s motto: Information is a force that opens boundless opportunities, but requires relevancy!

Dr. BJ Johnson
Dr. BJ Johnson
Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.

Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.

Mirjan Hipolito
Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.