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FOREX Trading Basics
Author: David J. Kosmider (info)
Website: http://eidoan.com/
Posted: November 19th, 2006 at 11:32 am EST
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The largest financial market in the world is FOREX, the Foreign Exchange currency market. Over $1 Trillion USD in value changes hands every day on this exchange, making it much larger than all the other US financial markets combined.
It’s called the “market that never sleeps,” because from early Monday morning, until late Friday night, the currency market is trading continuously. There are four trading centers set up around the world: Sydney, Tokyo, New York and London. They each take a different part of the trading day. This is one of the major advantages of the financial markets, you do not have to trade during normal business hours. It is possible to trade at any time during the day and make money.
The vast majority of all trading, especially the speculative trading, in the currency markets happens in the “majors.” These are the most widely traded currencies and consist of the United States Dollar, the British Pound, the Euro, the Swiss Franc, the Australian Dollar and the Canadian Dollar.
When you trade the currency markets, you buy long one currency and sell short another currency against it. The symbols are called “crosses.” For example, the EUR.USD cross is the Euro against the US Dollar, with this you would buy Euros and short Dollars. If you were to short the EUR.USD cross, you would be shorting, or betting against, the Euro and expecting the Dollar to rise in relative value.
Most FOREX brokers do not charge a flat commission, but instead widen the Bid/Ask Spread slightly and make their money that way. So instead of having to worry about beating both the spread and the commission charge on each trade, you just have to focus on the spread, which is still usually smaller than either stocks or options.
Leverage and low account minimums are two more great qualities of currency trading. With some FOREX broker accounts you can get up to 200:1 leverage and you can open an account with as little as $250. So with that $250 you can control up to $50,000 worth of currency positions.
Despite its unique advantages, however, FOREX can be just as risky if not more risky than the stock or options markets. With currency you are not buying ownership in a company that has real value as with stocks and you cannot use advanced techniques such as straddles that you can with options trading. When you buy or sell a currency cross you are basically betting on the economic strength of the counties involved. However, FOREX provides a unique trading experience and is at least something that all traders should be aware of.
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Currencies, David J. Kosmider, Trading
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