What is exchange rate trading?

In the financial world, there is no investment philosophy or term called exchange rate trading. However, the term is similar to trading foreign currencies where traders use exchange rates to compare the value of one currency to another.

An exchange rate determines the value of a country’s currency by comparing it to the value of another country’s currency. Foreign currency traders need exchange rates to determine which currency to buy and then trade for another currency to make a profit. For example, a trader may buy 100 U.S. Dollars, and then exchange or trade those dollars for Australian dollars. Based on the current exchange rate between the two currencies, that investment would net $128 Australian dollars.