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The Basics of Currency Trading

lender3212000 | Mar 16, 2010 |

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Currency Trading Basics - Forex Trading Offers Several Advantages

While currency trading can be quite complex, it is pretty easy to learn the basics and begin making your first trades. The following will give you an overview of the currency markets and the advantages they offer to traditional equity market trading. Once you understand how the market is structured, you will then be ready to move on to some more detailed information about how currency trading works.

24 Hour Marketplace

Forex trading is a 24-hour marketplace. At any time, day or night, there are active buyers and sellers somewhere in the world trading foreign currencies. Traders can immediately respond to breaking economic news and changing market conditions. Never again will you awaken to find that the stock you just purchased gapped down by 20% in response to a company conference call reporting negative information after the market closed the day before. While the Forex market can move very quickly at times, you don't have to worry quite as much about event risk as you do in the stock market where key newsworthy events are commonly released during periods in which trading is closed.

Greater Liquidity

With an average trading volume nearly fifty times as large as the New York Stock Exchange, you can be certain that there is always someone willing to take the opposite side of your trade. This results in both a tighter pricing spread (The difference between the bid and ask price) as well as pricing stability.

Access to Leverage

While the equity markets will provide leverage of 2:1 in the form of a margin account if you meet certain requirements of both the brokerage and the SEC, the currency markets can provide leverage of 50:1, 100:1, and even as high as 200:1. This is an extremely powerful moneymaking tool with proper risk controls in place. For example: With 200:1 margin, a trader can control $200,000 in currency with just $1000. Recently imposed regulations in certain countries have limited the amount of leverage traders can use but it still remains a very powerful tool.

Trade Commission Free

How many times have you had a profitable stock trade only to see your profits whittled away to nearly nothing after your broker takes a commission from both the entry and the exit transactions? How much do you usually pay for a trade? Most traders are used to paying $9.95, $14.95, $29.99, or possibly even more. Nearly all Foreign Exchange trades are free of commissions or fees meaning that traders can profit from even the smallest of price movements. In addition to the commission free trading, typical pricing spreads are as small as 1-5 Pips (1 Pip= 0.005 US Cents). You will see the term pip fairly often when it comes to currency trading. A pip is simply a unit of price movement and is the standard term used to describe price fluctuations between currencies within the Forex market.

Trade Both Long and Short

You have the ability to profit in both a rising and falling market. In the Forex market, you don't have to worry about whether you can find available shares to borrow in order to take a short position or being stuck paying dividends on an open short position. There are no up-tick rules, and traders may take a short position on any currency at any time without restriction.

No Day Trade Requirements

Forex currency traders may enter and exit positions as often as they wish without being required to maintain a minimum account balance or limit their number of trades per week as in the equity markets. This gives traders the freedom to take advantage of even the smallest trading opportunities that arise on any given day.

Small Minimum Account Balances

You don't have to be a wealthy investor to participate in the Forex market. Many Forex brokerages will allow you to open an account with as little as $200. When you are selecting which Forex broker or trading platform you intend to use, one important consideration is the ability to trade in micro lots or to build your own custom trade size. This will provide you with even more flexibility to scale the size of your trade to the amount of money you are trading with. One of the biggest mistakes new Forex traders make is to over leverage and enter trades that are too large for their account balances. It's better to start off small and work your way up to larger transaction sizes as you gain more experience with the market.

Learning How to Trade the Forex Market

Now that you understand a little more about the advantages of trading in the currency market, you are ready to take the next step. You will find that it doesn't take much time at all to learn foreign exchange trading basics and techniques. Once you are comfortable that you understand enough about how the Forex market works, you can open a free demo account with one of the major Forex brokerages and start doing a little practice trading until you are ready to open a live account. It's actually pretty easy to learn and you will find that it isn't nearly as complicated as it sounds. As your knowledge base grows, you will see that your track record of success should steadily improve over time.