Currency trading is the process of buying and selling currencies such as the US dollar, the euro, and the British pound.
Often called foreign exchange (forex) trading, it involves purchasing one currency while simultaneously selling another, with the aim of generating profits from currency movements. In the past, currency trading was mainly carried out by banks, institutional investors, and hedge funds. However, thanks to advances in technology, literally anyone can trade currencies today.
Currency trading takes place on the foreign exchange market — a global marketplace in which traders all over the world trade currencies. This market is the largest financial market in the world, with around $5 trillion in currencies traded every day.
Trading currencies on eToro is straightforward. eToro’s trading platform is easy to use and has been designed to give traders the best chance of success.

Currency trading is popular because it offers a number of benefits. Here is a look at some of the main benefits:

• Low capital requirements: One of the main attractions of currency trading is that you don’t need to have a lot of money to get started. This means that small investors can easily enter the market.
• A small deposit can go a long way: The reason you don’t need a lot of capital to start trading currencies is that it’s possible to use “leverage” to control a large amount of money with just a small deposit. The way leverage works is that you essentially borrow money from your broker to trade with more money than you have actually deposited in your account.
• Transaction costs are low: Another benefit of currency trading is that transaction costs are low. Typically, there are no transaction fees on currency trades. The main form of fee that traders pay is the spread between the buy and the sell price of the trade (more on this later).
• You can trade whenever you like: Finally, another big advantage of currency trading is that you can trade on your own schedule. The foreign exchange market is open 24 hours a day, five days a week. Trading begins with the opening of the Sydney session on Monday morning and closes with the New York session on Friday evening, which means there is plenty of time to trade.

The way currency trading works is relatively simple. When you trade currencies, you are betting on the value of one currency relative to another.

• Currency pairs: All currencies are traded in pairs. An example of a currency pair is GBP/USD. This particular currency pair reflects the British pound to US dollar exchange rate, or the number of US dollars to one British pound . In a currency pair, the first currency is known as the “base” currency and the second is known as the “counter” currency or “quote” currency.
• Going long or short: Once you have chosen the currency pair that you want to trade, the next step is to decide whether you think the base currency is going to strengthen or weaken against the counter currency, and take a position accordingly. If you believe that the base currency is going to strengthen against the counter currency, you buy (or “go long”) the currency pair. If you think that the base currency is going to weaken against the counter currency, you sell (or “go short”) the currency pair. So, for example, if you believe that the British pound will strengthen against the US dollar, you buy GBP/USD. Alternatively, if you think the British pound will weaken against the US dollar, you sell GBP/USD.
• Profit and loss: Your profit or loss will depend on the extent to which you get your prediction right. In currency trading, profits are measured in “pips”. A pip is the smallest move a currency can make. In a currency pair that is priced to four decimal places such as GBP/USD, a pip is a price movement of 0.0001. If you buy GBP/USD at 1.2500 and close the trade at 1.2510, your profit is 10 pips. The monetary value of your profit or loss will depend on how much money was risked on the trade and the amount of leverage used.

A currency’s strength is affected by supply and demand dynamics. If demand for a currency increases, its value will rise. However, if demand decreases, its value will fall. There are a number of factors that can influence supply of, and demand for, a currency. Here is a look at some of the main factors:

• Interest rates: A country’s interest rates have a major impact on supply of, and demand for, its currency. If a country increases its interest rates, demand for its currency tends to increase as foreign capital flows into the country. However, if a country lowers its interest rates, demand for its currency tends to fall as foreign capital flows out of the country.
• Inflation: A country’s rate of inflation (the gentle increase in the price of goods and services over time) can also impact supply of, and demand for, its currency. A high inflation rate can lead to reduced demand.
• Economic performance: Countries that are economically strong tend to see increased demand for their currencies. Conversely, countries that are experiencing economic challenges tend to see decreased demand for their currencies. Some economic indicators that currency traders often monitor include:
  
  • Gross Domestic Product (GDP): this is a broad measure of the overall health of an economy.
  • The unemployment rate: unemployment affects consumer spending which, in turn, affects economic growth.
  • Retail sales data: consumer consumption accounts for the largest part of a country’s GDP so sales data can provide valuable insights into the health of an economy.
  • Sentiment surveys: sentiment surveys such as Purchasing Managers’ Indexes (PMIs) can provide insights into a country’s level of economic expansion or contraction.
• Debt: A country’s debt levels can also have an impact on demand for its currency. Countries with large debts in relation to their GDP tend to be less attractive to foreign investors. This translates to lower demand for their currencies.
• Political stability: Foreign investors tend to seek out politically stable countries when investing their capital. Political turmoil in a country can result in lower demand for its currency as foreign capital moves to more stable countries.
  

Tip: The News-Feed on eToro’s Currencies page is a great resource for currency information. Here, traders and investors share information that can be very useful when trading currencies.

Before you begin trading currencies, it is worth taking the time to develop a trading strategy. This is essentially a plan to help you determine when to buy or sell a currency pair. Currency trading strategies can be based on fundamental analysis, technical analysis, or a combination of the two.

Fundamental analysis involves looking at all of the available information that could affect a currency’s strength or weakness. In this form of analysis, traders look at economic factors such as interest rates, inflation, and unemployment data to determine whether a currency is going to rise or fall.

Technical analysis, on the other hand, involves analysing price charts and indicators to predict a currency’s future movements. In this form of analysis, traders focus on chart patterns and trends and use historical price movements to predict future price movements.

3 popular technical analysis strategies:

• Trend trading: This strategy aims to capture gains by analysing a currency’s trend. A trend occurs when a currency moves in one direction for a long period of time. Once you have identified the trend, it may be possible to profit from it by trading in the same direction as the trend.
• Support and resistance trading: This strategy aims to capture gains by identifying a currency’s support and resistance levels. Support is the level below which the currency’s price finds it difficult to fall. Resistance is the level above which the currency’s price finds it difficult to go. Once these areas have been identified, it may be possible to profit by placing trades in the area where the currency’s price is likely to reverse.
• Breakout trading: This strategy aims to capture gains by identifying currencies that have broken through established support or resistance levels. Breakouts can be strong signals, especially when confirmed by other technical analysis indicators.

TIP: If you want to learn more about how to trade using technical analysis, please visit the eToro Trading School page where you can register for a free course.

After you have determined which form of analysis you will use to trade currencies, the next step is to develop a solid set of trading rules. This will help you to maintain discipline and also reduce risk.

This part of your strategy should focus on:

• Position sizing: Determining your optimal position size is an important part of a trading strategy.
• Entry points: Your plan should consist of rules that determine when to enter a long or short position in a given currency pair.
• Exit points: Your plan should also have rules that determine when to exit a long or short position.
• Stop losses: A trading plan should also focus on risk management tools such as stop losses.

There is no single formula for success when it comes to trading currencies. The key is to start with a basic strategy and refine it over time.

Tip: Learning from eToro’s Popular Investors can help you to develop a robust currency trading strategy. Many Popular Investors have significant experience trading currencies, and their advice can be invaluable.