Foreign Exchange Trading

Foreign exchange trading, which is commonly called forex trading, is the swapping of currencies from different countries. For example, you could trade US Dollars for Euros.

In the modern age of computers and digital trading, forex trading has become less dependent on a physical exchange of currencies. These days a trader can make a foreign exchange trade simply by placing an order using a computer. The trade can be held anywhere from minutes to years depending on the intention of the trader.

Reasons for Foreign Exchange Trading

Business Transactions
Actual foreign exchange trading is done by companies around the world every day in their normal course of business as they ship products to other countries. If a company in the US wants to buy a product from a company in Europe, they will usually need to exchange their US Dollars for Euros before the purchase. They can then pay the foreign company with Euros and receive their order.

Speculation
Foreign exchange trading is also conducted for speculative reasons, like profiting from price fluctuations. This type of trading is conducted by both institutions and individual traders on a daily basis. If a trader or organization expects the Euro to rise in value in relation to the US Dollar they would make a trade on a Euro/US Dollar trading pair called EUR/USD. This is not only buying Euros, but it is specifically trading Euros against US Dollars. It's called going long on EUR/USD. If the Euro increases in value against the US Dollar, the trader can end the trade resulting in an immediate profit. Changes in values are recorded in pips, which are 1/100th of 1 percent.

Foreign Exchange Pricing
Foreign exchange trading is conducted through a forex brokerage who receives prices from various banks over private networks. These networks are commonly called "The Interbank". While the interbank is not an actual single network, but rather a reference to individual networks that trade between each other. The prices between these banks can vary widely at any given moment.

Foreign exchange trading is now considered to be a common investment activity. Traders can trade against US Dollars, Euros, British Pounds, the Japanese Yen, the Australian Dollar, and many more. This type of trading was once reserved for banks and for the very rich, now a foreign exchange trading account can be opened with as little as $10 and some paperwork.