What is foreign exchange trading?

Foreign trading is the practice of buying and selling of the international currencies in a global foreign exchange market. This might sound simple but we all know the role that Forex trading plays in the economy of any country.

Couple of decades ago, people was engaged in foreign exchange for speculative and practical reasons called commerce. Around the early years of 2000 the foreign trading scenario changed completely. With the development of Internet, every process became online and trading took a dynamic shape. Internet-based currency brokers started with speculative currency trading and today it is possible for almost everyone to register with an online currency broker and trade sitting at home.

Though foreign trading is an extremely risky practice, many people are addicted to it. Therefore if you are planning to start up, make sure that you know all the basic concepts and prepared for surprises.

Understand the exchange rates

Currencies are always traded in pairs and one type is exchanged against the other in foreign exchange trading. The rate at which the exchange happens is known as exchange rates. As per the trend, most of the traders trade currencies against US Dollar. The other most traded currencies are the euro (EUR), the Swiss franc (CHF), the Japanese yen (JPY) and the British pound sterling (GBP). They make up for the majority of traded currencies and sometimes regarded as "the majors" in foreign exchange trading.

Currency Prices: the idea of 'bid' and 'ask'

As a currency broker involved in foreign exchange trading, you will offer to buy and sell currencies at different prices. You will always find a discrepancy or something called 'spread' between the bid price and the ask price. This spread is an indicator of the fraction of each trade done by the broker as a commission. For example, in a given currency pair, a small spread between the bid and ask prices would indicated a high trading volume. And if there is a wide spread then it can be concluded that there has been low volume Foreign Exchange Trading or infrequent trading.