What is Currency Trading? - Definition & Examples Video

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: What is Deflation? - Definition, Causes & Effects

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:04 Currency Trading
  • 0:32 How Does the Forex Work?
  • 1:25 The Language of Currency
  • 2:49 Currency Fluctuation Causes
  • 4:00 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed
Lesson Transcript
Instructor: Jennifer Francis

Jennifer has a Masters Degree in Business Administration and pursuing a Doctoral degree. She has 14 years of experience as a classroom teacher, and several years in both retail and manufacturing.

Currency trading may only seem like something of necessity when one travels from one country to another. This lesson will discuss currency trading as a profitable venture, and how owners/managers of such businesses deal with the fluctuations that can occur in currency valuation.

Currency Trading

Currency trading, often referred to as foreign exchange or Forex, is the purchasing and selling of currencies in the foreign exchange marketplace, done with the objective of making profits. It is referred to as 'speculative Forex trading.' Forex trading is the largest market in the world, with nearly $2 trillion traded on a daily basis, with quick growth projections. The main factor that differentiates currency trading from other types of trading is its liquidity.

How Does the Forex Work?

Currency trading is usually done through brokers and market makers. Investors who trade this way depend on the brokers to place a corresponding trade on the international market. For example, the currency exchange of US dollars to Jamaican dollars is US$1 = JA$114.59, so US$2,000 can earn the investor JA$229,180, who can then in turn reinvest.

Forex trading occurs when the buying and selling of one currency for another takes place at the same time. Together, the two currencies form a currency pair. Each one is represented by three letters, with the first two letters representing the name of the country, and the third letter representing the name of the currency, as shown below:

  • United States Dollar: USD
  • Eastern Caribbean Dollar: ECD
  • Australian Dollar: AUD
  • Japanese Yen: JPY

The Language of Currency

When writing currency pairs, the market uses the following format: EUR/USD = 1.23700, rather than expressing them this way: EUR$1 = USD$1.23700. In the preferred format, the base currency is shown on the left, the Euro in this case, and the quote currency is shown on the right, which is the US dollar.

When investors are selling, the exchange rate of the foreign currency tells them how many units of the quote currency they will get for one unit of the base currency. Traders make decisions to buy if they think that the value of the base currency might increase. In the example, traders would purchase the US dollar with the Euro if they expect the value of the US dollar to increase to $1.31. The change that takes place is how the investor makes a profit.

Making Money

Let's imagine that a hypothetical investor, Laura, buys US$100,000 at $1.23700 and then holds on to it until its value increases to $1.31; her profit would be $131,000, as shown in the calculation below:

(100,000 x 1.31) - $123,700 (100,000 x 1.23700) = $7,300.

Laura makes two trades, one to purchase the US dollar, then another to sell it, which yields $7,300 in profit. Ultimately, the investor is counting on fluctuations in values of currencies.

Currency Fluctuation Causes

There are many factors that can contribute to changes in the value of a currency. Some of these factors include terms of trade, differences in inflation rates, and public debt. Let's take a look at each one of these factors.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support