What Is Currency Trading?

By Justin Martin

Currency trading is taking advantage of shifting foreign exchange rates. The exchange rate between two currency types specifies what one currency is worth in relation to another currency. It has been estimated that approximately $2 trillion USD of currency exchanges hands each and every day. The foreign exchange market is one of the hugest markets in the entire world.

A market based exchange rate will vary according to the values of either currency being compared. A currency will generally become more valuable when the demand for that currency is greater than the available supply. The same currency will become less valuable whenever the demand for it becomes less than the available supply.

So if Japan’s people are investing their net worth into things other than Japanese yen, and at the same time more Americans are investing in American dollars than have in a long time, chances are the American dollar will be highr than the Japanese yen.

Let’s say that the United States’ exchange rate with Japanese yen is 1 : 100 then one American dollar is worth one hundred Japanese yen.

The foreign exchange markets are typically very liquid because worldwide, the most powerful international banks provide a market around the clock. Global foreign exchange market daily averages of the Bank for International Settlements in 1998 were $660 billion and now have increased to $2.3 trillion (2006).

Just like stocks go up and down as their estimated values change, so too do the values of various world currencies go up and down from time to time. And just like stocks and bonds can be traded, so too can foreign currency. Foreign exchange traders make trillions of dollars every day, as there are always shifting economies and so shifting foreign exchange rates.