Currency trading is also called foreign exchange or forex trading. In simple terms, forex or currency traders buy and sell one form of money with another form of money.
For example, you might buy euros in exchange for US dollars at an airport kiosk when traveling. Or you might short-sell the EUR/USD forex pair in the spot forex market. You could also trade futures contracts on the euro or, of course, binary options and spreads on Nadex.
Whichever instrument you choose, you will buy and sell at a rate of exchange set by the collective buying and selling of traders around the world. That rate fluctuates based on numerous factors, like the action of central banks, the relative strengths of the economies represented by the two currencies, and the opinion of the traders themselves. Sometimes other markets, like crude oil or stocks, can indirectly affect currency rates.
For example, the GBP/USD, the exchange rate between the British pound and US dollar, has gone from about US$1.95 in 2008 to US$1.35 in 2018, a drop of roughly 30%. This reflects, among other things, the financial crisis, Brexit, and changes in interest rates.
The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency." The currency pair’s value shows how much of the quote currency is needed to purchase one unit of the base currency. So in this case, the base currency is the GBP, British pound, and its value is quoted in dollars.
Money, currency, and futures contracts
Currency can be any form of money, including coins and paper notes, which is issued by a government and circulated within an economy. The word “currency” refers to its circulation. In the past, objects like cowrie shells were used as currency, and recently, digital currencies like Bitcoin have emerged which are not backed by any national government, but rely on technology like Blockchain to ensure value.
Used as a medium of exchange for goods and services, currency is the basis for trade. Most countries have their own currency. Switzerland's official currency is the Swiss franc; Japan's is the yen. The euro is the currency for all the member states of the European Union. In some countries, a foreign currency such as the US dollar is accepted as legal tender.
The current exchange rate is known as the spot forex rate. There are also futures contracts on currencies, which are contracts to buy or sell a currency at a future date at a certain price. Currency futures prices may not be the same as spot forex prices, since they reflect traders’ expectations about what may happen in the time until delivery.
The underlying indicative price of Nadex forex contracts is based on the spot forex rate.
Currency or forex pairs
All forex trades involve the simultaneous buying of one currency and selling of another. Because the two parts happen simultaneously, the currency pair itself can be thought of as a single unit, an instrument that is bought or sold.
If you buy a currency pair, you are, in effect, buying the base currency and selling the quote currency. The bid (buy price) represents how much of the quote currency is needed for you to get one unit of the base currency.
Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. The ask (sell price) for the currency pair represents how much you will get in the quote currency for selling one unit of base currency.
Which forex pairs can I trade on Nadex?
The most heavily traded forex pairs are: EUR/USD, USD/JPY, GBP/USD, and USD/CHF, which are the euro, Japanese yen, British pound, and Swiss franc rates versus the US dollar. These pairs are considered by many to drive the global forex market. Some add the USD/CAD and AUD/USD pairs to the list of major forex pairs.
These pairs can reflect long-term economic relationships. The AUD/JPY, for example, reflects the Aussie-Yen carry trade, in which investors borrow yen at a lower interest rate and use it to buy currencies in countries with higher interest rates. The EUR/GBP has gained interest in the aftermath of Brexit.
Nadex offers binary options and spreads on all of those, plus EUR/GBP, AUD/JPY, GBP/JPY, and EUR/JPY.