Candlestick Trading Blog
January 29, 2008
Trading Currency
The forex market is becoming very popular these days. Trading currency is different than trading stocks for very many reasons and is seen by many investors the preferable method to make money. Unlike trading futures, trading options, or stock trading, trading currency does not take place on a regulated exchange. All members trade with each other based on credit agreements and currency trading is not controlled by any central governing body. Forex trading takes place 24 hours a day and because of this traders have the advantage of customizing their own trading schedules. Trading currency relies on no clearing houses either and there is no arbitration panel to referee disputes. While forex is the largest financial market in the world, it has only recently gained popularization due to the increase in internet trading. Trading currency was initially only done by very large financial institutions, multinational corporations, and hedge funds. The origin of the forex trade can be traced back centuries to the existence of the Babylonians. They were the first to exchange paper notes and receipts and were of the first to establish the Barter System. Value was placed on goods such as gold and silver, feathers, stones, metals and even teeth. Of course there were also coins made of the preferred metals, and then in the Middle Ages the paper form of currency was introduced. The primary reason that fx trading exists today is to facilitate the exchange of one currency into another for the multinational corporations who are trading currency continuously. They may do this for things such as payroll, or payment for costs of goods and services from foreign vendors, and also for merger and acquisition activity. These corporations can only account for 20% of the market volume, with the other 80% trading currency as individuals, multi-billion dollar hedge funds, or other large financial institutions. While some forex traders deal with less liquid currencies in the world, most are trading currency using the seven most liquid currency pairs in the world. There are four majors including the EUR/USD (euro/dollar), USD/CHF (dollar/Swiss franc), USD/JPY (dollar/Japanese yen), and the GBP/USD (British pound/dollar). There are three commodity pairs as well when trading currency, including the NZD/USD ( Facts for Trading Currency 1) There are no commission fees in the forex market. Successful forex traders trade spreads posted by some of the world’s largest banks. This market is a principals-only market and forex brokers make their money through the bid-ask spread when trading currency. 2) There is no uptick rule. There is no restriction on short selling when forex currency trading, no matter which way the market is moving. The trader has the same ability to trade in a rising market as in a falling one due to the fact that trading currency involves only the buying of one currency and the selling of another. 3) The smallest increment of a trade when trading currency is the “pip.” It stands for percentage in point because all prices are quotes to the fourth decimal point. 4) No physical exchange of currencies ever takes place when trading currency. All trades are computer entries and are netted out depending on market price. 5) A “carry” is the most popular trade when foreign currency trading. It rests on the fact that every currency in the world has an interest rate attached to it and it is practiced by both the smallest retailers and the largest hedge funds. 6) Approximately 1.9 trillion dollars are traded in the foreign exchange market daily. It is estimated that more than USD 1,200 Billion are traded every day as well. The forex market is very interesting and is the most liquid of all financial markets. Its increasing popularity has many investors reevaluating their strong portfolio and has many skeptics’ full attention. To learn more about trading currency, there are many sources available online to get you started. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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