The advent of widespread internet connections has made it easier than ever before to engage in small-scale international forex trading. Forex trading used to be a highly specialized profession carried out by a selected few, but today pretty much anyone with an interest in forex trading and some money to risk can sign-up for a forex trading account with an online broker site and start trading. The transaction costs can be kept low and you can make a nice profit even with a small start-up capital.
Modern forex trading platforms online tend to come with a lot of tools that the trader can utilize, as well as guides, news services, and more. Statistical aids, analyzing programs and automatic trading are just a few examples of tools that can come in handy for the forex trader. Find tools and more guides about trading and finance on these websites:
Trading
The basic foundation of forex trading is the trading of currency pairs. The currency codes used are normally the standard ISO 4217 currency codes.
Data from the year 2015 shows that all four of the most traded currency pairs on the fx market involves USD as one of the currencies.
EUR/USD
USD/JPY
GBP/USD
USD/CHF
(Translation: USD = United States Dollar, EUR = Euro, JPY = Japanese Yen, GBP = British Pound Sterling, CHF = Swiss Franc)
The first currency in a currency pair is the base currency. So, in the currency pair EUR/USD it is the Euro that is the base currency while the United States Dollar is the counter currency.
If you for instance see the quotation EUR/USD 1.2566 it means that 1.00 Euro is traded for 1.2566 United States Dollars.
Another example: USD/CHF 1.0009
In this example, the United States Dollar is the base currency and the Swiss franc is the counter currency. 1.00 USD is traded for 1.0009 CHF.
About currency exchange
As soon as two populations with different currencies come in contact with each other and wish to engage in some type of trade, a need for currency exchange normally arises. In the olden days, it was common for coins to be maid out of precious materials, so that the trader from a foreign land only had to convince the traders to trust in the value of the material (e.g. silver, gold or copper). They didn’t have to worry about the quality of the issuer. Even so, professional currency traders have existed for thousands of years, making it easier for people with different currencies to conduct business with each other.
Today, we have a very different situation, where currency is largely something that exists digitally and a forex trader isn’t sitting on a pile of gold, silver and seashells from various parts of the world.
The forex market is decentralized, with several larger and medium sized electronic brokering platforms functioning as hubs. Two of the most important ones are Thomson Reuters Dealing and the Electronic Broking Services (owned by ICAP plc). Both are part of the interbank market, the top-level foreign exchange market where banks exchange currencies.