How Does Currency Trading Work?

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Trading currencies against one another is one of the foremost ways countries and individuals all contribute to creating wealth around the world. Without currency trading, there would be little international consensus on how much any given currency is worth outside of its native country. The role of currency trading in global policy making and trade cannot be overstated, as it sets the values that power every major financial decision. The question remains, however, about how this whole thing works.

Currency Valuations

Every currency in the world has a valuation, or an amount of other currencies that it is worth. This valuation changes constantly, and no individual or single entity has ultimate control over it. For all of the posturing that international banks and governments do over the value of various currencies, no one's power over them is even close to complete.

Currencies have no intrinsic value in and of themselves. The only value a currency has is what someone else is willing to pay for it. Because of this fluid value, different currencies constantly trade for variable amounts of other currencies.

The Currencies Themselves

A currency is nothing more than money within its native country. People get paid in all sorts of different currencies, and then they buy what they want and need with it. For most people, Forex currency trading online with UFXmarkets never enters their minds. Their money is for paying for food, rent, entertainment and anything else they want and can afford.

The value a trader has for his or her native currency forms the beginning of the trades he or she makes. When a person starts trading, they will typically begin by trading their native currency against others. This is partially to make it easier to understand the process through using something familiar, and also partly because native currency is where most people start out.

Pairing Currencies Together

When an individual trades one currency for another, they practice what is called currency pairing. Any two traded currencies can be paired against one another, and one can either buy or short sell the second currency in the pairing. For example, a person may want to trade Japanese yen and US dollars. If this trader wants to short sell yen, he would simply buy USD:JPY to bet that the yen's value will go down relative to the dollar. If he wants to bet that yen will rise, he only need to short sell USD:JPY.