Foreign exchange trading is essentially the trading of the currency from two countries against each other. The pairs are predetermined by brokers, who may or may not offer a match for the currency pair that you want to trade.
For example, a popular pair that is widely traded is EUR/USD. The EUR/USD is the European Dollar, also known as the EURO, and the USD, which is the US Dollar. When the Euro becomes worth more money in dollars, the pair goes up, and when it is worth less money in dollars, the pair drop in value.
How Foreign Currency Trading Work?
Currency trading was very difficult for individual investors prior to the internet. Most currency traders were large multinational corporations, hedge funds or high-net-worth individuals because forex trading required a lot of capital. With help from the internet, a retail market aimed at individual traders has emerged, providing easy access to the foreign exchange markets, either through the banks themselves or brokers making a secondary market. Most online brokers or dealers offer very high leverage to individual traders who can control a large trade with a small account balance.
Currency trading is a 24-hour market that is only closed from Friday evening to Sunday evening, but the 24-hour trading sessions are misleading. There are three sessions that include the European, Asian and United States trading sessions.
Although there is some overlap in the sessions, the main currencies in each market are traded mostly during those market hours. This means that certain currency pairs will have more volume during certain sessions. Traders who stay with pairs based on the dollar will find the most volume in the U.S. trading session.
The whole purpose of trading forex online, for most people, is to make money. Corporations sometimes use it to offset a contract or future purchase that they plan to make. Retail traders trade in the forex markets to make money on changes in the values of currencies over time.