US currency trading is similar to trading in other securities. As with much speculative trading in commodities such as metals and agricultural products, the trader does not actually receive, nor is required to ship any physical currency. Profit and loss is based on index movements.
Practice trading “on paper” before investing real money. Forex offers a wide variety of educational services on currency trading. Opening a Forex account is a good first step to take. Resources such as investopedia.com also offer concise and valuable explanations of the many aspects of currency trading.
Whereas stocks or consumer purchases are defined in dollars, currency trading involves a pair of currencies defined in terms of each other. For example, a dollar/euro (USD/EUR) index may be 1.2 today and 1.3 tomorrow. This means that it takes $1.20 to buy one Euro today, and $1.30 to buy the same Euro tomorrow.
As with stocks, metals, and other securities, currency indexes have to be traded with liquidity in mind. Exotic (to the US population) currencies may land a great profit in theory, but only if someone else “completes” the exchange when you want to close the deal and seal in profit (or cut losses). When starting in currency trading, stick to pairs of major currencies such as USD (US dollars), EUR (Euros), and JPY (Yen). Volume is a key metric to research when deciding which currency pair(s) you want to trade.
A currency pair index is often displayed in candlesticks. A candlestick has four components: high price (or index value), low, opening and closing values. The high and low prices are displayed as “whiskers” or “shadows” extending above and below the “candle” height. If the high or low price matches the opening or closing prices, respectively, the “whisker” simply isn’t there. If a candle is white or green, the index increased over the trading span of each candle — meaning the closing price marks the top of the candle. If the candle is black or red, it decreased — the closing price would be the candle bottom.
Candlesticks add information about index movement that line graphs do not capture. In fact, an entire school of technical analysis focuses on candlestick patterns to predict future index movements.