Currency Trading in Forex

Definition

Currency trading is the buying of one currency while simultaneously selling another in an attempt to benefit from changes in their relative values.

Currencies are therefore traded in pairs.

How Does Currency Trading Work?

A currency does not have one universal trading value by itself.

Its value is expressed relative to another currency.

For example:

EUR/USD

compares the euro with the US dollar.

When someone trades this currency relationship, they are taking a view on how the value of one currency will change compared with the other.

Why Are Two Currencies Involved?

Every foreign exchange transaction involves an exchange.

If one currency is being acquired, another currency is being given up in return.

That is why forex prices are written as currency pairs.

Why Do People Trade Currencies?

Different participants use the currency market for different reasons.

These can include:

international business,

exchanging money,

hedging currency exposure,

and speculating on changing currency values.

A retail trader who trades currencies for potential profit is engaging in speculation.

Currency Trading Involves Risk

Currency values can move in either direction.

Expecting one currency to strengthen does not mean it actually will.

Currency trading therefore involves the possibility of both gains and losses.

Key Takeaway

Currency trading involves exchanging one currency for another and taking a view on their relative values.

Because currencies are compared with each other, they are traded as currency pairs rather than as isolated prices.