Online Currency Trading: The Basics

2007-03-08 10:33:40

( Financial )



The online currency trading market is the biggest financial market, with daily volumes reaching as high as US$1.9 trillion. Also known as "foreign exchange currency trading," "forex," or "FX," or "spot" market, it is 36 times bigger than the daily market for equities and 60 times the daily traded volume of the global futures markets.

Until recently, the forex market used to be limited to big players such as investment banks, multinational corporations, major commercial banks, currency dealers, global money managers, and international money brokers. Now, foreign currency trading is available to individuals who want to speculate on the exchange rate between two currencies. In recent years, there has been a proliferation of companies offering online trading platforms for people hoping to make a profit when the currency market moves in their favor.

Online currency trading is different from other financial markets in that trading is available 24 hours a day. This is made possible by the fact that somewhere around the world, at any time, except for a brief period on weekends, there is a financial center open for business where players are trading currencies.

How Foreign Currency Trading Works

In the spot market, you buy or sell currencies, hoping to turn a profit from your chosen position. Since currencies are always traded in pairs (i.e., USD/JPY, EUR/USD, GBP/EUR), transactions involve the sale of one currency and the purchase of another. If you expect the euro (EUR) to strengthen against the US dollar (USD), you BUY EUR/USD, in which you simultaneously bought euros and sold US dollars. For example, you purchased 10,000 euros in January 2001 at the rate of 1 euro for every 96 US cents, or 9,600 USD for 10,000 EUR. In May 2003, when the EUR/USD rate became 1.18, you exchanged your 10,000 EUR back to USD. Your 9,600 USD purchase had become 11,800 USD, making you 2,800 USD richer.

Most online currency trading platforms offer around 20 currency pairs with the US dollar, the euro, the British pound (GBP), the Swiss franc (CHF), and the Japanese yen (JPY) the most commonly traded currencies.

Buying and Selling

As in all markets, there are two prices for every currency pair, one for buying, and another for selling. The difference between the two is the spread, or the cost of the trade. The spread usually ranges from three to ten pips (or points). Thus, if the selling rate for JPY/USD is 109.50 and the buying rate is 109.55, the spread is 5 pips.

Analysis

Currency traders position themselves to buy or sell with the aid of technical data and/or economic fundamentals. Technical data include charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to determine the best positions. Fundamentalists make use of news, economic factors, and government-issued indicators and reports to identify possible movements.


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