Currency Trading 101

Making Money with Money!

By Glenn R. Grundberg

Currency trading is the art of taking advantage of the difference, or "spread", between shifting foreign exchange rates. The exchange rate between two currency types sets what one currency is worth in relation to another currency. For example, let’s say that the United States’ exchange rate vs the Japanese yen is 1 : 100. Therefore, one American dollar would be worth one hundred Japanese yen. If the value of the yen should rise, the trader holding dollars would profit, and vice-versa. It has been estimated that approximately $2 trillion USD of currency changes hands every day. The foreign exchange market is one of the largest markets in the world.

Worldwide, large international banks provide a market around the clock thereby keeping the foreign exchange markets very liquid. Daily global foreign exchange market  averages of the Bank for International Settlements in 1998 were $660 billion and increased to $2.3 trillion to date in 2006.

Market based exchange rates vary according to the value of the currencies being compared. A currency will usually become more valuable when the demand for that currency is greater than the available supply. Conversely, the same currency will become less valuable whenever the demand for it exceeds the available supply.

As a rough example, if currency traders are investing in things other than Japanese yen, and at the same time more traders are investing in American dollars, chances are the US dollar will be higher against the Japanese yen. This difference creates an abitrage opportunity.

Just as stocks fluctuate in value as their estimated and perceived values change, so do the values of various world currencies. And just as stocks and bonds can be traded, so too can foreign currency. Foreign exchange traders make billions of dollars every day, as there are always shifting economies and so shifting foreign exchange rates.