What Is Currency Trading?
You have probably seen advertisements on television, internet banners and even heard about it on the radio. But what on Earth is currency trading? And why would I want to learn such a thing? Furthermore, are there really guys just sitting on a tropical beach working 4 hours per day, living the life, only by trading currencies?
The answers to the first two questions are a bit complex, and will be explored throughout these lessons.
However, the answer to the third question, "Can people live by trading currencies?", is: Yes! Loads of savvy traders spend their days on a tropical beach, sipping cocktails and living off the markets.
The remainder of this lesson presents the basics of currency trading and will help you to understand how it works and how currency traders make money.
WHAT’S THE BIG DEAL ABOUT CURRENCY TRADING?
Whether you know it or not, you have already participated in the currency game, also known as Foreign Exchange, ForEx or FX (for short...).
Look around you. Chances are something in the room you are in was made in a country that uses a different currency than your own. Take for example your mobile phone. It is very probable that parts of your phone were made in China. If you live in a country other than China, at some point your local currency was traded for Yuan (the Chinese currency).
Well, think about a person living in China who works in a factory that makes mobile phone parts. This person is not going to be paid in United States Dollars, or Euros. Instead he or she will be paid in Yuan, the Chinese currency. In order to get the parts for your phone, at some point somewhere, someone had to exchange your local currency for Yuan.
This is the essence of currency exchange.
The currency exchange markets are the largest markets in the world. Everyday companies and banks exchange trillions of United States Dollars for other currencies in order to purchase the goods and services we all consume on a daily basis. So much currency is traded each day that the price of buying and selling currencies (known as the exchange rate) is in constant fluctuation.
Let’s put this into perspective. Every day an average of over 5.5 trillion USD are exchanged. The NY Stock Exchange, the largest stock market in the world, trades a measly $50 billion per day… That’s a mere 1% of the size of currency markets!
OK, GOT IT… SO WHAT EXACTLY IS CURRENCY TRADING?
You may be thinking to yourself, “Great, it’s a really huge market, but what does it mean for me?”.
Well, the answer to this question is quite simple. Individuals DO make money by participating in the currency markets. Let’s take a look at an example so you can see how this works.
If you have ever travelled to a foreign country, chances are you had to exchange your currency for the local currency. Let’s say you are from Europe and take a vacation to Mexico. Before you leave, you visit your bank and you withdraw 1000 euros which you then exchange for Mexican pesos. At the time you could buy 17 pesos for every 1 euro. So in total you bought 17,000 pesos for your 1000 euros.
After exchanging your cash, you catch the plane to Mexico and are seated next to a local who invites you to stay in his villa, spare no expense. You decide to accept the invitation and end up spending your entire vacation laying on the beach, with your every whim catered to by a horde of friendly house staff. In other words you did not spend a single peso while abroad.
At the end of your holiday you return to Europe with 17,000 pesos in your pocket. However, during your stay the euro to peso exchange rate changed and the value of 1 euro is now 15 pesos. At the airport when you exchange your 17,000 pesos, you actually get back 1133.33 euros. That’s 133 euros and 33 cents more than your initial 1000 euro purchase.
In other words, you just made money by buying one currency, holding it, and selling it back to your home currency for a profit.
BUT I DON’T HAVE ANY PLANS TO TRAVEL TO MEXICO RIGHT NOW...
You don’t actually have to travel to another country to trade currencies. Actually, you can do so from the comfort of your own home via online brokers. Online brokers allow you to buy and sell currencies over the internet and provide you with the tools to make the right decisions about exchange rates.
This works by purchasing a currency online, holding onto it in until the exchange rate changes, and then selling the currency back into your home currency at a profit. Don’t worry, we will get deeper into how this is done in later lessons.
CASHOUT allows you to make risk-free currency trades directly on your phone. The app uses real time exchange rate data and charts, so that you can practice trading currencies in a safe environment. Because CASHOUT is just a game, you do not actually trade real currency on the app. This gives you a safe environment to master the ins and outs of trading, without all the stress.
In the next lesson we will teach you about the most fundamental element of currency trading: the Currency Pair.