A currency trader is a person or company that buys and sells some of the world’s different currencies either as a matter of need or as a profit-making endeavor. Some purchase a nation’s currency in order to be able to buy goods and services with it, while others speculate that the value of a purchased currency will appreciate and produce a profit. Currency trading — also called foreign exchange, FOREX or FX — is a complicated business with the potential both for good profits as well as devastating losses.
The foreign exchange market shares little in common with other financial markets. The first major difference is its size — the value of all FOREX trades cleared in a single day is estimated at between $3 trillion and $4 trillion US Dollars (USD). This is vastly more than all the stock exchanges worldwide, combined. The New York Stock Exchange (NYSE), for instance, clears trades worth an aggregate of $50 billion USD in an average day.
Another major difference between FOREX and any other type of market is that there are no brokers and no central clearinghouse. By contrast, standard trades of stocks and bonds, and even the more exotic type of investments like derivatives, nearly always must be placed with a broker. The brokers, depending on the nature of the investments, execute the transactions under the auspices of one or another of the stock exchanges or commodities exchanges. Currency traders deal directly with each other, on their own behalf, with no middleman. Thus, a private investor who wishes to make a FOREX transaction can deal directly with any company that also deals in FOREX, and make a currency trade without paying commission or any other fees.
Currency prices are generally quoted on a “bid-asked” basis, and traders make their money on that “spread” — that is, currency is bought for the “asked” price, and sold for the “bid” amount. In addition to making a profit from the spread, many traders leverage their transactions significantly, sometimes paying as little as 10% of a trade’s purchase price from their own funds and borrowing the other 90%. The currency trader must repay the loan, but if the value of the currency purchased increases substantially, the leverage can transform a gain from modest to quite considerable.
Many currency traders are large companies with interests and operations in many different nations. Their purpose in currency trading is more functional than speculative. For example, they may have operations centers in many different countries and have a need to pay their employees and conduct business in the local currency. Tourists and other travelers can also be considered currency traders, and they have the same need for purchasing power in local economies. These traders generally take possession of the actual funds, either in their general accounts or in cash for immediate use.
Although a speculative currency trader may sometimes hold an investment for a relatively short period of time, like a day or a week, in many cases a currency will be held for much longer periods, sometimes a year or longer. This usually guarantees a modest return as long as the currencies purchased are relatively stable, such as Japanese Yen (JPY) or American Dollars (USD). Most trading worldwide concentrates only on eight currencies – the Euro (EUR), Swiss Franc (CHF), British Pound (GBP), Japanese Yen (JPY), and the dollars of the US (USD), Australia (AUD), Canada (CAD) and New Zealand (NZD). A currency trader may sometimes deal in exotic currencies not included on this list, but there generally isn’t much of a market for those currencies, and thus little opportunity for profit.
