Q:

What is trading currency?

A:

Quick Answer

Trading currency refers to the investment practice of taking a position in one monetary currency relative to another. Currency trading is often conducted through short-term transactions. Trading currencies is distinct from simple foreign-exchange transactions, in which the intent is to acquire another currency for spending purposes.

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Full Answer

Individuals, institutions and corporations all engage in currency trading for various reasons. Individuals and institutions are often looking to earn profit as a primary motive, while companies sometimes use currency trading as a hedge against the risks of conducting business in foreign currencies where currency values fluctuate.

Currency trading is performed through currency pairs. An investor might take a position in the euro and U.S. dollar pairing, for instance. If someone believes the value of the euro is going to increase relative to the dollar going forward, he might buy the euro against the dollar. In contrast, someone who believes the euro is going to decline in value against the dollar would take a sell or short position in the euro-dollar pair.

Trading currencies is risky, especially for investors who lack discipline and stay in bad trades too long. Currency prices can fluctuate with great volatility, and it is possible for someone to lose his entire investment in a major shift in prices.

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