Currency Trading

Imagine the following scenario.

A person living in New York City, anticipating a trip to Europe, decides to prepare by trading some of his American dollars for euro currency.

He learns that the dollar is currently valued very well in comparison to the euro and discovers that he can purchase 100 for $125. Deciding to take advantage of the situation, he purchases 1000 for $1250.

He spends a couple weeks traveling in Europe. In preparation for his return to the states he discovers that the dollar has declined in value compared to the euro. He sees that 100 will now fetch almost $150. He rounds up 1000 and receives $1500.

The net effect for this traveler is that he was able to go on this trip and realize a profit of $250 on the exchange of currencies.

A very similar scenario takes place millions of times per day on the foreign exchange currency market (Forex). Instead of the traveler in the example, however, the currency exchanges are the deliberate result of the possessors of a certain currency attempting to profit by exchanging that currency for a different one.

This is commonly known as Forex trading and it represents a 4 trillion per day business.

Individual investors can participate in the Forex market with five commonly available tools. These tools are a computer, an internet connection, Forex trading software, a Forex broker and trading capital.

Many people already possess the first two tools. Trading software is very frequently available free of charge. The services of a broker do carry a fee that must be accounted for when investigating the feasibility of participating in currency exchange transactions.

Trading capital represents the single largest start-up expense for the Forex trader. The amount varies between brokers, but it is quite possible to set up a small Forex trading account that will supply a realistic taste of what it's like to trade currencies on the Forex markets. Some brokers permit currency trades of a micro lot, which equal 1000 currency units.

Returning to the example of the traveler, if the exchange rate on his return from Europe had decreased by one Pip, the smallest possible amount, instead of receiving $1500 for his 1000, he would receive $1400, meaning that each Pip is equivalent to $.10.