What is 'Electronic Currency Trading'

Electronic currency trading is a method of trading currencies through an online brokerage account. Electronic currency trading involves converting base currency to a foreign currency at the market exchange rates through an online brokerage account.

BREAKING DOWN 'Electronic Currency Trading'

Electronic currency traders use analysis based on technical and fundamental indicators to help them forecast the movement of the currency pair being traded. Because currency trading by this method is wholly electronic, execution speeds are extremely fast, allowing the trader to quickly buy and sell currencies to cut losses and take profits at a moment's notice.

Electronic currency trading happens 24 hours a day and is only closed from Friday evening to Sunday evening. The 24 hours of trading is actually comprised of three sessions that include the European, Asian and United States trading sessions. Although there is some overlap in the sessions, the main currencies in each market are traded mostly during those market hours. This means that certain currency pairs will have more volume during certain sessions. Traders who stay with pairs based on the dollar will find the most volume in the U.S. trading session.

Electronic Currency Trading Pairs

Electronic currency trading happens in pairs. Unlike the stock market, where you buy or sell single stops at a time, you have to buy one currency and sell another currency in the forex market. Most currencies are priced out to the fourth decimal point. A pip or percentage in point, is the smallest increment of trade. One pip typically equals 1/100 of 1 percent.

Beginning traders often trade currency in micro lots, because one pip in a micro lot represents only a 10 cents move in the price. As such, these low stakes make losses easier to manage if a trade doesn't produce the intended results. In a mini lot, one pip equals $1 and that same one pip in a standard lot equals $10. Some currencies move as much as 100 pips or more in a single trading session making the potential losses to the small investor much more manageable by trading in micro or mini lots.

The majority of the volume in currency trading happens in 18 currency pairs, compared to the thousands of stocks available in the global equity markets. Although there are other traded pairs outside of the 18, the eight currencies most often traded are the U.S. dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and the Japanese yen (JPY). Although nobody would say that currency trading is easy, having far less trading options makes trade and portfolio management an easier task.

 

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