Your guide to currency trading

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What is currency trading?

Commonly known as forex trading, currency trading refers to the purchasing and selling of the world’s currencies with the objective of making profits. Unlike stocks or commodities, currency trading does not take place on a regulated exchange and it is not controlled by any central governing body. Instead, forex is an over-the-counter (OTC) market where currencies are traded in financial centres around the globe, such as New York, London, Frankfurt, Tokyo and Sydney. This means the market is open 24 hours a day, with the exception of weekends, giving you the opportunity to trade around the clock.

Currency traders include governments and central banks, commercial banks, other financial institutions and institutional investors, commercial corporations, currency speculators and individuals. Financial centres around the world function as anchors of trading between this wide range of multiple types of buyers and sellers. Trades between the market participants can be extremely large, involving hundreds of millions of dollars.

The forex market assists international investments and trade by enabling currency conversion. For instance, it allows a business in the European Union to import goods from the United States and pay in the US dollars, even though its income is in euros.

Currencies are always traded in pairs. For that, the forex market does not set a currency's absolute value. Instead, it determines its relative value by setting the market price of one currency if paid for with another. For example: 1 EUR is worth X USD, or GBP, or CHF.

currency trading

Therefore, in a typical forex transaction, a party buys some quantity of one currency by paying with some quantity of another currency.

What are the currency pairs available for forex trading?

currency trading

There are three main types of currency pairs available in the forex market: major, minor and exotic. They are divided into these groups depending on how much they are used daily. The categories consider regular trading activity and liquidity of each currency.

  • Major currency pairs
    Major currency pairs consist of the most frequently traded currencies globally, offering greater liquidity and lower volatility. Those pairs always have the US dollar on one side. There are seven major currency pairs: GBP/USD, EUR/USD, USD/JPY, USD/CHF, USD/CAD, NZD/USD and AUD/USD

  • Minor currency pairs
    When a currency pair does not include the US dollar, it is called a minor currency pair or a cross-currency pair. Those pairs are less traded than the major currency pairs. For that, they are usually less liquid and have wider spreads. The most widely traded minor pairs consist of the British pound, euro or yen. Some of the examples are EUR/GBP, EUR/AUD, GBP/JPY, NZD/JPY and GBP/CAD.

  • Exotic currency pairs
    Exotic currency pairs usually include a currency from an emerging market country. They are typically illiquid, with fewer market-makers and much wider spreads. Examples of exotic currency pairings include EUR/TRY, USD/HKD, NZD/SGD, GBP/ZAR, NOK/RUB and AUD/MXN.

Why is the forex market important to traders? 

The foreign exchange market is the biggest financial market in the world, with a daily turnover of around $6.6trn. The figure’s approximate break-down is as follows:

currency trading

One of the key factors that differentiates currency trading from other types of trading is its exceptional liquidity. Moreover, it is also the largest market in the world in terms of trading volume, followed by the credit market. The sheer volume of currency trading that occurs in a day can make FX markets extremely volatile – and it is this volatility that makes it so appealing to traders. Volatility allows for higher profits but also increases the risks.

currency trading

What hours of the day can you trade currencies?

Forex market activities are conducted across various networks in several markets around the globe; there is no one centralised place to trade currency pairs. Consequently, the market is run by a network of banks working across four different time zones (namely London, New York, Sydney and Tokyo). This allows traders to trade 24 hours a day.

The market is open 24 hours a day from 17:00 (EST) on Sunday until 16:00 (EST) on Friday. The international scope of the FX markets means that there are always traders making and meeting demands for a particular currency.

Historically, the forex market has three peak trading sessions; this is known as the forex three session system. These sessions consist of the North American (New York), European (London) and Asian (Tokyo) sessions. The forex markets are most active when these financial centres are conducting business and their stock markets are open. Sydney stock market hours also affect the Asian trading session. When these sessions overlap there are particular movements in currency pairs that are affected by both open regions. For instance, when the European and American sessions overlap, currency pairs such as EUR/USD and GBP/USD are particularly volatile.

Local timeBST (GMT +1)EDT
Sydney open - 07:00
Sydney close - 16:00
22:00 - 07:0017:00 - 02:00
Tokyo open - 09:00
Tokyo close - 18:00
01:00 - 10:0020:00 - 05:00
London open - 08:00
London close - 16:30
08:00 - 16:3003:00 - 11:30
New York open - 08:00
New York close - 17:00
13:00 - 10:0008:00 - 17:00

August-Winter peak sessions

Local timeGMTEST
Sydney open - 07:00
Sydney close - 16:00
20:00 - 05:0015:00 - 00:00
Tokyo open - 09:00
Tokyo close - 18:00
00:00 - 09:0019:00 - 04:00
London open - 08:00
London close - 16:30
08:00 - 16:3003:00 - 11:30
New York open - 08:00
New York close - 17:00
13:00 - 22:0008:00 - 17:00

How to trade forex CFDs

Since currency trading does not take place on a centralised exchange but on the OTC market, there are two most popular ways an individual can choose to trade forex: either through a spot market or through CFDs.

currency trading

A forex spot transaction, or FX spot, involves the agreement between two parties to buy one currency against selling another at an agreed price within a short period of time. This is a direct exchange between two currencies. Such transactions involve cash. For instance, a FX spot on the GBP/USD pair involves one party buying the pound sterling in exchange for US dollars at the rate determined by the market.

Alternatively, those looking how to trade forex can consider trading a contract for difference (CFD) on a currency pair and speculating on the price difference of the underlying asset. A CFD is a financial contract, typically between a broker and an investor, where one party agrees to pay the other the difference in the value of a security, between the opening and closing of the trade.

Trading currency CFDs gives you the opportunity to trade the forex pair in both directions. You can thus take both long and short positions depending on your market perception. For instance, if you believe the British pound will appreciate against the US dollar, you can open a long position on the GBP/USD currency pair. If you think it will depreciate, you can open a short position.

Advantages of trading forex CFDs

  • Leverage. Leverage can make your wins go even further. You can trade CFDs on margin, meaning you can gain greater exposure for your initial capital. This is done by putting up only a fraction of the value of a trade and essentially borrowing the rest from your broker. This is known as leveraged trading and can amplify your wins as well as your risk.
  • Hedging. Hedging is the technique where someone opens a position to offset any potential loss that their current holdings may incur. The forex market is particularly volatile, which is what attracts a lot of traders. However, some may still want to employ hedging techniques to mitigate loss. Traders can take positions in markets that are negatively correlated, such as holding a long position on USD/CAD to hedge against falling oil prices.
  • Tax-efficiency. CFDs are exempt from stamp duty and losses can be offset against profits in other holdings that contribute to your capital gains tax liability. This is particularly useful when using CFDs to hegde.

Wondering where to trade forex CFDs? Just spend three minutes of your time to sign up and start your journey of currency trading with Capital.com. Try our award-winning trading platform or download our mobile app, which will become your smart CFD trading assistant.

Why trade CFDs on currency pairs with Capital.com?

Advanced AI technology at its core: A Facebook-like news feed provides users with personalised and unique content depending on their preferences. If a trader makes decisions based on biases, the innovative News Feed offers a range of materials to put him back on the right track. The neural network analyses in-app behaviour and recommends videos and articles to help polish your investment strategy.

Trading on margin: Providing trading on margin (30:1 for major currency pairs), Capital.com gives you access to the forex market with the help of CFDs.

Trading the difference: When trading CFDs on currency pairs you don’t buy the underlying base currency itself. You instead speculate on the rise or fall of its value. CFD trading is no different from traditional trading in terms of its associated strategies. When trading CFDs you can go short or long, set stop and limit losses.

All-round trading analysis: The browser-based platform allows traders to shape their own market analysis and forecasts with sleek technical indicators. Capital.com provides live market updates and various chart formats, available on desktop, iOS, and Android. Study live currency pairs within the platform whilst simultaneously browse tailored news based on your trading behaviour.

Focus on safety: Captal.com puts a special emphasis on safety. Licensed by both the FCA and CySEC, it complies with all regulations and ensures that its clients’ data security comes first. The company allows to withdraw money 24/7 and keeps traders’ funds across segregated bank accounts.

Follow Capital.com to always stay on top of the latest market developments and discover forex trading tips, analysis and forecasts.

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