What is Currency Trading ?
Many expats are familiar with buying and selling currencies when they move between currencies. This is usually done via a bank or professional currency exchange company. The banks and the exchange companies make a profit buy purchasing low and selling higher or vice versa. In fact most currencies no longer charge a commision fee, as there profit is in the currency trading.
 
t is possible for the independent investor to buy and sell currencies electronically, without holding the physical currency. The exchange is done via a currency trading firm (see right). A currency trading firm allows you to buy and sell different currencies.
 
For example if you thought the strength of the Euro was going to go up against the British Pound, you could by EUR/GBP and sell EUR/GBP at a later date. This later date/time could be a couple of seconds, days, weeks or even years. The timescale and amount you buy/sell is up to the trader, and dependent on how much liquid cash is in your trading account. This liquid cash can be leveraged so a £1,000 trading account could be leveraged to give the buying power of £100,000. This means any gains are amplified, but also any losses are amplified as well.
 
Currency trading is also used as a hedge against currency exchange risk. If you have a business or earnings in one country (e.g. UK/USA), and live in another country (e.g. Spain), then you can hedge the exchange rate to ensure you are not negatively impacted by currency fluctuations.
 
To be profitable in trading currencies, knowledge of the currency markets is required. Traders usually depend on two types of analysis : Fundamental and Technical
 
 
Technical Analysis
Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time.


 
 
Technical analysis is applicable to stocks, indices, commodities, currency futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low, or close for a given security over a specific time frame. The time frame can be based on intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume or open interest figures with their study of price action.
 
Click here for recent Currency Technical Analysis on FinanceSpain.com 
Fundamental Analysis
A currency fundamental analyst identifies and measures factors that determine the intrinsic value of a financial instrument, such as the general economic and political environment, and including any that affect supply and demand for the underlying product or service. If there is a decrease in supply but the level of demand remains the same, then there will be an increase in market prices. An increase in supply produces the opposite effect.

For example, an analyst for a given currency studies the supply and demand for the country's currency, products or services (Merchandise Trade); its management quality and government policies; its historic and forecasted performance; its future plans and the most important for the shorter term, all the economic indicators.

From this data, the analyst constructs a model to determine the current and forecasted value of a currency against an other. The basic idea is that unmatched increases in supply tend to depress the currency value, while unmatched increases in demand tend to increase the currency value. Once the analyst estimates intrinsic value, he compares it to the current exchange rate and decides whether the currency ought to rise or fall.

One difficulty with fundamental analysis is accurately measuring the relationships among the variables. The analyst must make estimates based on experience. In addition, the currency markets tend to anticipate events and discount them in the currency value in advance.
Currency Trading Firms
If you would like to experience currency trading for yourself, below are relevant links to online trading firms. It is possible to trade a 'dummy' account initially to get a feel for trading without the risk. We cannot guarentee external links/companies, however we do review and approve listings.