Foreign currency trading is one of the world’s largest financial markets. However, large financial traders dominate currency forex trading. There is a much lower presence of retail investors or traders. In forex trading, you trade on the value of one currency in comparison to a currency from another country.
Trading in foreign currency can be helpful for those seeking to hedge risks arising from their exposure to currencies of various countries. The losses arising out of fluctuations in the exchange rate of two currencies can be hedged by foreign currency trading. This is the reason forex trading markets are dominated by multinational companies, hedge funds, and financial institutions operating in multiple countries.
Here are five things you need to know about currency trading:
- In foreign currency trading, you generally trade on the value of one currency in comparison to another foreign currency. The foreign currency trading revolves around purchase and sale of currency pairs, such as U.S. Dollar and Euro, U.S. Dollar and British Pound, Euro and British Pound, or US Dollar and Japanese Yen.
- The presence of retail traders is limited in the forex currency trading market, although such trading has been around since antiquity when merchants used to trade in coins from different countries to facilitate cross-border transactions. However, with the advent of online forex trading, retail traders have also started entering this market in a big way.
- Large entities such as financial institutions, multi-national companies, and hedge funds generally undertake forex currency trading to hedge the foreign exchange rate volatility risks arising out of their presence in various countries. Retail traders can also hedge the risks from their exposure to other markets like stocks and commodities through forex currency trading.
- The advent of online currency trading has made it very easy for traders to trade in forex currency market, as they can trade round the clock and across various countries of the world. All one needs is an account with a broker or dealer providing online currency trading services.
- Forex trading allows you to leverage a large margin from much smaller capital investment and therefore huge profits can be earned from currency forex online trading. However, the risks also grow manifold in online currency trading when the trading calls turn wrong and losses could be huge for the unwary. Therefore, you need to be careful before taking a position in forex trading. In-depth understanding of the market for foreign currency trading is necessary.
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