Exchange Rates

Foreign exchange rates are simply the price of money. A given exchange rate reflects the relative market value between exactly two currencies. The rate is always expressed as the cost, in one currency, of one unit of the other currency. For instance, if the cost of one UK pound sterling, GBP, is 1.600 U.S. dollars, USD, then the USD-GBP exchange rate would be expressed as 1.600 USD/GBP, or 1.600 dollars for every one pound sterling. Furthermore, the reciprocal of an exchange rate (one divided by the exchange rate) expresses the cost of the other currency, or 0.625 GBP/USD using the first example.

Bid and Ask Prices

Traders in the foreign exchange market seldom, if ever, receive their desired currency at the exact market exchange rate. The reason is because currency brokers, as service providers, adjust the exchange rate they offer by between roughly 1 and 4 percent in order to obtain compensation. The price at which brokers sell one currency for another is called the "ask" price and comprises an upward adjustment. By contrast, the price at which brokers buy a currency is called the "bid" price and reflects a downward adjustment.

Trading Currency for Practical Reasons

At a fundamental level, a currency trader places a foreign exchange trade in order to obtain an amount of a specific currency with the intention of using it as a medium of exchange. In such trades, an individual or entity solicits a currency broker for either the equivalent in a foreign currency of an amount of money he already has, or a specific amount of a foreign currency that he wishes to obtain. This may include "changing" money at an airport prior to international travel, or placing a trade in order to cover an invoice on imported goods and services.

Trading Currency for Speculative Purposes

A trader places a speculative currency trade if she wishes to buy or sell a specific currency at a given exchange rate level in order to make a profit from a movement in that exchange rate at a later time. For this reason, a speculative currency trader has no intrinsic interest in a currency apart from her perception thereof as an appreciable market asset. Speculation is the most common reason for trading currency, and speculative trades are placed no differently than those described earlier. Speculative trades differ in that traders must place at least two trades: a buy and, later, a sell. Since it is not possible to predict with certainty the future movements of a specific exchange rate, speculative currency trading carries a tremendous risk of loss. How to Trade Currencies Online

The first step to online trading is finding a broker who handles currencies. You can research online brokers at Forbes or Smart Money. Once you locate a broker, you set up an account by making an initial deposit. The minimum deposit can range from about $1,000 to $10,000 or more. Another important factor in finding a broker is the commission rate. Full-service brokers charge more, because these brokers offer more services, such as research tools. Discount brokers offer reduced commission fees. The order placement system is also very important; you must find a system that's easy to understand and use. Trading currencies online is becoming very popular, so there's plenty of information available on how to trade profitably.