Currency trading involves buying and selling currencies on the foreign currency exchange market, or Forex. In this market, a currency is bought and sold based on current market trends. The currencies are traded in pairs. Each pair is identified by its three-letter abbreviation. Examples of currency pairs include the United States dollar and the Canadian dollar, or USD/CAD, and the euro and the Japanese yen.
Currency trading is the largest market in the world. Currency prices fluctuate according to the economy and geopolitical risk of the countries involved. Interest rates, central bank policies, economic growth, and political conditions in a country can influence the demand for a currency. Traders profit when they make a buy/sell decision based on the direction the currency pair moves.
Large multinational companies and banks dominate the currency trading market. While they may not be able to directly trade currency, they may have the power to influence market prices in a certain direction. However, these companies usually trade in small amounts compared to banks or speculators. Therefore, the impact they have on market rates is relatively small in the short term.
Currency trading can be challenging and requires plenty of education. Many new traders fail and lose money, but with proper education and practice, success is possible.