In conventional foreign exchange trading (money/currency trading), so-called counter transactions (OTC – over the counter) are carried out between two parties. Unlike shares, these transactions are not regulated via a central exchange and are therefore not subject to an official body that monitors the transactions and intervenes in trading in the event of irregularities.
Every day, several trillion euros are traded in foreign currencies via foreign exchange trading that makes the currency market has the highest liquidity worldwide. The large transactions in the market are mainly carried out by institutions such as banks or large hedge funds. They either act in order to generate profits themselves through exchange rate differences or do business on behalf of their customers.
These customers are often large, internationally active companies that, for example, have to exchange the income for exported products in foreign currencies into the local currency so that employees can be remunerated accordingly in the local currency.
For us as private investors, the gateway to the foreign exchange market is through the many forex brokers. Many different currencies can be traded against each other via the broker. This is done by buying or selling currency pairs at current exchange rates through the broker’s trading platform.
The currency pair. What happens when buying or selling?
In currency trading, currency pairs consist of two different currencies. These currencies are traded against each other. The currency pair as such is to be seen as a unit and can either be bought (long) or sold (short).
For example, when we buy EURUSD, we buy in euros and sell US dollars. When we sell EURUSD, we sell euros and buy US dollars. These transactions happen automatically with every Forex broker as soon as we click the BUY or SELL button on the trading platform.
How big is the trading volume in the foreign exchange market?
The exact trading volume cannot be determined when trading currencies, since the transactions are not centralized.
Foreign exchange markets are open 24 hours a day, five days a week, with three separate sessions each day:
At what times are the currency markets open?
- London Session – 9:00 a.m. – 5:00 p.m. (Monday to Friday)
- New York Session – 2:00 p.m. – 10:00 p.m. (Monday to Friday)
- Asian Session – 10:00 p.m. – 8:00 a.m. (Monday to Friday)
The times of the different sessions overlap somewhat. This means that at the end of the London session and at the beginning of the New York session, the largest trading volume in the foreign exchange market is generally to be expected.
How do traders benefit from price fluctuations?
Due to the constantly changing exchange rates of different currencies, it is possible that we can benefit from these exchange rate fluctuations when trading currencies. You can bet on rising or falling rates of the different currency pairs. If a trader believes that a currency pair is going up, he opens a LONG position and if he believes that the currency rate is going down, he opens a SHORT position.
- LONG Trade – The betting on rising prices and thus the purchase of a currency against another currency (e.g. EUR against USD => long EUR / USD)
- SHORT Trade – betting on falling prices and thus selling a currency against another currency (e.g. EUR against USD => short EUR / USD)
If the currency pair moves in the assumed direction after opening the trade, we as traders can book a profit in the trading account.
A word of caution: Many people are looking into trading as a way to fix their bad credit because of its high liquidity not minding the risks involved in the trade. Some take out bad credit loans in order to participate in this kind of investment. This move is very risky. Financial advisers recommend talking to seasoned forex brokers in order to minimize the risk.