• Currency Trading

    Currency trading is different from stock and options trading. There is no regulated exchange that handles the trading and there are no clearing houses to guarantee the trades. Credit agreements hold currency trading together. It’s basically no more than a promise and a handshake. The system works well though. All the parties need each others’ cooperation and so things run rather smoothly.

    Brokers handle the trades and find buyers and sellers and charge commission. Since currency trading is not handled by any exchange, large firms are dealers. Dealers don’t charge commission, but they do assume market risk. They make their money through the spread between bid and ask prices. When you make a currency trade you will not actually pay the bid or ask price indicated on the charts. When your trade is complete and the price you paid or sold for has cleared, you will see what the actual cost or payment was.

    Forex

    The Foreign Exchange (Forex) (FX) is, at the core, a speculative market. No exchange of currencies ever actually happens. Traders simply accumulate or lose pips based on their speculative trades.
    Currency or Forex markets are the largest and most liquid world markets (in volume and in the amount of money). About $2 trillion a day is traded. One currency is traded for another in currency markets (example: the euro for the US dollar). Most currency trading occurs between central banks, commercial banks and large corporations. The largest currency trader currently is the Deutsche Bank in Europe, but currency markets are also traded by individual traders.
    You can also trade currency futures, where the underlying security is the currency exchange rate (example: the euro to the US dollar exchange rate). Currency futures trading is much like any other futures trading and is traded in the same way.
    Futures based upon currencies are traded on an exchange such as the CME. But Forex (regular currency market) trading is traded by currency brokers and is not as controlled as currency futures trading. For that reason many currency traders prefer to trade futures as opposed to the Forex.
    Pip

    Exactly What is Currency Trading?

    PIP stands for “percentage in point.” It’s the smallest increment of trade in FX. Prices are quoted to the fourth decimal point. The fourth decimal point change is called the pip. It’s basically equal to 1/100 of 1%. Profits and losses are measured in pips.

    Currency trading is always done in pairs, going long and short in two different currencies. EUR/USD means shorting the euro and going long on the dollar.

    The currencies most traded in the forex market are:
    EUR/USD (euro/dollar)
    GBP/USD (British pound/dollar)
    USD/JPY (dollar/Japanese yen)
    USD/CHF (dollar/Swiss franc)
    AUD/USD (Australian dollar/dollar)
    USD/CAD (dollar/Canadian dollar)
    NZD/USD (New Zealand dollar/dollar)

    Currency trading even has its own jargon and nicknames:
    Cable, sterling, pound = alterntive names for the GBP
    Greenback, buck = nicknames for the US dollar
    Swissie = nickname for the Swiss franc
    Kiwi = nickname for the New Zealand dollar
    Aussie = nickname for the Australian dollar
    Loonie, the little dollar = nicknames for the Canadian dollar

    There Are Pros and Cons to Currency Trading

    On the plus side: there are no big commissions or exchange fees; the market is open 24 hours a day; speed of trade fills.
    On the down side: You can lose lots of money quickly; there are scam artists alive and well in the currency trading world.
    Currency trading is gaining popularity every day and it offers yet another avenue of investment for the trader.

    © 2011, www.daytraderoptions.com. All rights reserved.

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