Currency Trading – Lesson 1: The Basics of Currency Trading
Lesson 1: The Basics of Currency Trading
With over $3 trillion in average daily turnover, the foreign
exchange market is five times the size of the U.S. futures
market, making it the largest market in the world.
Surprisingly, this sleeping giant is unfamiliar terrain for
most individual traders and investors. Until the
popularization of Internet trading a few years ago, forex
was primarily the domain of large financial institutions,
multinational corporations, and secretive hedge funds.
But times have changed: the U.S. dollar recently fell to
record lows, and everyone, from car dealers to
bartenders, is waking up to the impact of currencies.
How does this Market Differ from other Markets?
Unlike the trading of stocks, futures, or options, currency
trading does not take place on a centralized exchange,
but instead through different forex brokers. At first glance,
this ad hoc arrangement must seem bewildering to
investors who are used to structured exchanges like the
NYSE or CME. However, this arrangement works
exceedingly well in practice: participants in forex must
both compete and cooperate with each other, and selfregulation
provides an effective amount of control over
the market. Furthermore, reputable retail forex dealers in
the United States become members of the National
Futures Association (NFA), and by doing so, they agree
to binding arbitration in the event of any dispute.
Therefore, it is critical that any retail customer who
contemplates trading currencies do so only through an
NFA-member firm.
Here are five other factors that make the currency market
different from other markets:
1. Simple Bet—Pro-Dollar or Anti-Dollar.
When it comes to trading any of the dollar-based currency
pairs, the general idea is simple: you are either pro-dollar
or anti-dollar. Because 80 percent of all currency
transactions involve the U.S. dollar, the outlook for the
greenback and U.S. economic data tend to dominate the
price action of the currency pairs.
2. Forex Trades on Public Data—No Fraud Like
Enron. Since the currencies we offer are the ones from
the most developed economies in the world, such as the
US, the UK, the Eurozone, and Australia, accounting
fraud is not an issue in currency trading. Also, economic
data is released at the same time to everyone, which
means that there is no such thing as insider trading. For
example, CNBC will announce the nonfarm payroll
numbers the instant that it is released, leveling the playing
field for all investors.
3. The Ability to Earn Rollover. Rollover is the interest
paid or earned for holding a position overnight. Each
currency has an interest rate associated with it. Because
forex is traded in pairs, every trade involves not only two
different currencies, but their two different interest rates. If
the interest rate of the currency you bought is higher than
the interest rate of the currency you sold, then you will
earn rollover (positive roll). If the interest rate on the
currency you bought is lower than the interest rate on the
currency you sold, then you will pay rollover (negative
roll). Rollover can add a significant extra cost or profit to
your trade.
4. 24-Hour Trading. The currency market is the most
liquid market in the world, and one of the most seamless.
With FXCM, you can trade 24-hours a day, between 5:15
PM (EST) Sunday and 4:00 PM (EST) Friday. In the forex
market, there are relatively few price gaps. Its sheer size
(trading over US$3 trillion on average each day) and
scope (worldwide) also makes the currency market the
most accessible market in the world. You can trade
before work, during work, or even after work, and there
will always be a market open.
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