By Dan Alvarez
Currency trading and day trading stocks have some similarities and differences. Today, the foreign exchange market, also known as "FX," provides traders with many advantages absent from the stock market, so it is worthwhile for them to learn a bit more about the biggest financial market in the world.
When someone visits a foreign country and pays for a product or service in his home currency, a currency exchange takes place - an exchange of the home currency for the foreign currency. This can happen if the tourist pays with a credit card issued by a bank in his home country (the bank converts the price of the product or service to the home currency based on an exchange rate, charges the tourist the corresponding amount in his home currency, and pays the merchant in the foreign currency). It can also indirectly happen if the tourist first goes to a bank in the foreign country, exchanges an amount of his money to the foreign currency (based on an exchange rate), and then pays the merchant in the foreign currency. Either way, a foreign exchange transaction takes place. The home currency is exchanged (sold) for a foreign currency (bought). If the tourist is American and he is visiting France, he will be exchanging dollars for euros. In the world of foreign exchange, it is said that he is selling dollars and buying euros at the same time. This is the same thing that happens when an investor day trades currencies online, although the trader has access to different prices than the tourist.
Even though it is theoretically possible for the tourist to exchange dollars for euros in anticipation of a rise in the price of the euro relative to the dollar, the spreads (difference between the bid and ask price) would be too wide to be practical for short-term trading purposes. The online trader, on the other hand, would have at his disposition prices (exchange rates) with tight enough spreads for day trading. Until recently, currency transactions of this type (Interbank transactions) were only available between banks and huge customers (corporations and very large speculators like George Soros and others). The Interbank market, also known as the cash or spot market, is an electronic over-the-counter market where international banks post bids and offers for the world's currencies.
About the Author
Author is an established writer and arbitrage trader. Author makes it easy for any one wishing to start in trading.
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