Wednesday, March 7, 2012

What is Currency Trading?

In the world of investment, there are tons of different asset classes that an individual can theoretically trade and profit from. However, one of the least understood among these asset classes is the currency or Forex market. Through this market, individuals and other entities around the world trade various currencies, almost all the time. Using high levels of leverage, massive amounts of money are exchanged on an ongoing basis.

Currency is Fluid

There is a great deal of fluidity in the currency exchange. When you are doing Forex currency trading online with UFXmarkets, you have the potential to profit a lot from this fluidity. For the most part, currencies are not based on anything solid or tangible, with no world currencies being based on hard assets like gold or silver anymore. This fluid value allows them all to be traded.

A currency can literally be worth any amount of any other currency. While many currencies are compared against the US dollar, one can theoretically trade any two currencies against one another. How many Thai Baht is a Great British Pound worth? However many pounds you can get for your baht, of course.

Everyone Sets the Value

A lot of people think that governments and major banks act to somehow unilaterally set the value of currencies, but this is not true at all. While governments and big banks do act to control currency valuations, they only have a modicum of control over the relative value of their currency. Printing up more money, releasing more government bonds or tightening the >money supply can only exert so much control over the global economy.

The Forex market sets a lot of the value any given currency possesses in the simplest way possible. Through bartering one type of currency for another, everyone involved in the currency exchange determines how much any given currency is worth. There are different levels of trading and various entities that exert more power through their trades, but in the end, every trader makes an impact.

How Profit is Made

Profit is made on the currency exchange by trading one currency against another and receiving more than you give. For example, if you trade a Canadian dollar for an Australian dollar and other traders bid the Australian dollar higher, you can then trade it back for more than the Canadian dollar you just had. This is the simplest form of trading imaginable wherein you simply exchange a unit of one currency for a number of units of another currency. When you add leverage into the mix, the profit potential goes up tremendously.

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