This is a sponsored post on behalf of eToro
If you’re looking to get into currency trading, how do you go about doing it?
Is there a trick to finding the best platform? And are there any pitfalls to be aware of?
In this article, we’re going to break down all you need to know about buying and selling foreign currency, including the advantages, disadvantages, and risks.
Keep on reading for all the details or click on a link below to head straight to a section…
- What is currency trading?
- Which currencies are most commonly traded?
- The advantages of trading currency
- What factors can influence currency values?
- What are the risks?
- How can you find the best platform?
What is currency trading?
Currency trading – also known as foreign exchange (forex) trading – is the buying and selling of fiat currency.
If you’ve ever gone on an overseas holiday, then it’s likely you’ll have been involved in trading currency when you swapped your pounds for dollars or euros, dinars, or dong!
Currency trading for the purposes of making a profit used to be an activity reserved for the banks and big financial institutions. However, thanks to the emergence of online currency trading platforms – including eToro who are sponsoring this article – trading currency has become even more accessible.
Which currencies are most commonly traded?
You probably won’t be surprised to hear that the US dollar is the most traded currency in the world. Data from April 2022 suggests US dollars are involved in almost 9 in 10 (88.5%) currency trades.
The euro is the second-most popular currency to trade. Euros are involved in 30.5% of trades.
Other popular currencies traded include the Japanese Yen (16.7% of trades), British Pound (12.9%), and Chinense Renminbi (7%).
Currencies are traded in pairs
We say ‘involved in’ for the stats above as currencies are traded in pairs. In other words, there are always two currencies involved in every currency trade.
When you look at currency quotes, the first currency you see is known as the ‘base’ currency, while the second currency is known as the ‘counter’ – or ‘quote’ – currency.
For example, if you see ‘GBP/USD’, the base currency here is pounds sterling, while the counter currency is the US dollar.
What are the advantages of trading currency?
There are a number of advantages to trading currencies. Let’s take a look at some of them.
1. Currencies can be traded at any time. Unlike the stock market, international currency markets are open 24 hours a day, 5 days a week.
To put it another way, there’s no downtime when it comes to trading currency. This can be a boon for traders keen to buy and sell beyond normal market hours. For reference, the FTSE closes at 4.30pm on weekdays.
2. The market is liquid. Another advantage of trading currency is that the market is very liquid. This means that if you want to buy and sell currency at the spot price, you’ll probably be able to complete your transaction instantly. (While the most traded currency pairs are very liquid, it is worth noting that there are a handful of pairs that are not).
This isn’t always the case when it comes to buying shares.
which factors can impact currency values ?
While currency markets are often unpredictable at the best of times, there are a number of factors that can have an impact on the value of individual currencies.
1. Interest rates. Many individual countries have the power to set their own interest rates. In the UK interest rates are controlled by the Bank of England.
When interest rates are high this can make a currency more valuable. However, when interest rates are low – especially in comparison to other countries – a currency may start to slide.
This is one reason why the Bank of England often faces pressure to increase interest rates when the US Federal Reserve hikes rates across the pond. We saw this happen on a few occasions in 2022.
2. Economic performance. The economic performance of a particular currency can have a big impact on the value of its domestic currency.
For example, if a country has high unemployment, struggles with inflation, and/or has a high debt ratio, then these factors might negatively impact the value of its currency. In contrast, a booming economy accompanied by low unemployment and low Government borrowing may help to strengthen a domestic currency.
3. The political situation. Strong political stability and a strong currency often go hand in hand.
On the same note, a country with shaky and unpredictable politics may have a hard time supporting the value of its currency.
What are the risks?
Currency trading, like any other type of trading, carries risk.
One risk to be aware of – and perhaps the most obvious – is the chance you’ll lose money. This will happen if a currency you buy falls in value, and you then sell that currency for a lower price than you paid for it.
It’s worth being realistic here. You’ll almost certainly encounter losses if you decide to buy and sell currency. The key to managing this risk is to ensure you don’t lose more than you can afford to lose, and that you avoid making knee-jerk or emotionally-driven decisions following a loss.
Instead, it can be a good idea to have a strategy and stick with it. This may include setting up a stop-loss to ensure you don’t suffer a seismic loss.
It’s also worth knowing that currency trading losses can be magnified if you use leverage. This is where you borrow money to fund your trade. (eToro offers retail investors leverage of up to x30 for major currency pairs).
While leverage enables you to buy more currency without having to put it all down at the time of trading, do be aware of big potential losses if things don’t go as anticipated.
To minimise this risk, again, it can be very important to have a trading strategy and commit to it.
How can you find the best platform?
There are a number of platforms out there that allow you to trade currency in real time.
The key to finding the right currency trading platform is to find one that has low fees, is easy to use, and requires just a small amount to trade.
While eToro is sponsoring this article, we can honestly say that the platform ticks all of these boxes, which is why we’re happy to recommend them.
The eToro platform is straightforward to use and the minimum needed to start trading currencies is $200.
A $5 fee applies when you make a withdrawal through eToro, while FX fees apply to non-USD deposits. There’s also a $10 inactivity fee, but this only applies if you don’t log in for 12 months. For more information, see the fees page on the eToro website.
eToro is regulated in the UK and you can find the full details here.
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This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.