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Currency Trading
Currency Trading - The Best Way To Make Money? by
Jim Pretin
The Foreign Exchange market (Forex) is truly the largest exchange in
the world. The amount of dollars traded on the Forex market on a
daily basis is in the trillions. Most of this currency trading takes
place between between large banks, central banks, currency
speculators, multinational corporations, governments, and other
financial markets and institutions. However, individual traders are
starting to get in the mix, using internet discount brokers such as
Etrade to participate in the currency exchange market.
There is no central exchange or meeting place for the Forex. All
trading is done over computer networks between traders in different
parts of the world. Also, unlike the stock market, the foreign
exchange market is open 24 hours per day, because it is a global
market. A trader in Hong Kong may be exchanging currency with a
trader in Australia while an American trader is sleeping.
There are several different markets within the Forex exchange
system. First, there is the spot market. The spot market deals with
trades that are based on the current values of currencies. One
person trades a certain amount of currency with another trader in
exchange for an equivalent amount of a different foreign currency.
Spot trades take two days for settlement.
The other two types of foreign exchange markets are the forward and
futures markets. In the forward market, the buyer and seller agree
on an exchange rate and a transaction date is set for a specific
time in the future, at which point the trade is executed regardless
of what the rates are at that time. On the futures market, futures
contracts are bought and sold based upon a standard contract size
and maturity date. Futures trades take place on public commodities
markets.
A currency quote is listed differently from a stock quote. Stocks
are quoted in terms of price per share. Currency exchange prices are
listed as either a direct quote or an indirect quote. A direct quote
uses the domestic currency as the base and the foreign currency as
the quote. An indirect quote works the exact opposite way.
So, if you were to view a quote in an American newspaper that said
USD/JPY = 75, that would be a direct quote and would mean that $1 of
U.S. currency is equal to 75 Japanese yen. If that same quote
appeared in that same American newspaper and was listed as JPY/USD =
0.013, that would be an example of an indirect quote.
As with stock prices, currency exchange prices have a bid and ask
spread. The current bid is the amount of foreign currency that
someone is willing to spend in order to buy $1 U.S. base currency.
The ask is the amount of foreign currency that someone is demanding
in order to be willing to sell $1 U.S. base currency.
The Forex markets are generally considered to be less volatile than
then stock market because within the course of a trading day, it is
highly unlikely for the value of a single currency to move all that
much. With equities, it is not uncommon for a trader to buy a stock,
and then a negative press release causes the stock to lose
considerable value within a day or even a couple of hours.
Sometimes, however, the Forex can be volatile. If there is a
significant economic or political development with a certain
country, the currency of that country can lose value quickly.
There is a higher degree of liquidity on the currency exchange then
there is on the stock exchange because the currency exchange is open
24 hours per day and because the very nature of currency exchange is
to bet on when certain currencies will go up or down; so, it is easy
to sell your position in a certain currency even when the value of
that money is going down. A plummeting stock is more difficult to
unload, but not impossible.
If you want to begin currency tranding, try to set aside some money
and open an account with an online broker. Start slowly, then as you
get the hang of it, work your way up to larger trades and higher
volume. However, do not gamble your nest egg on currency trading
because inexperienced traders can lose everything they have rather
quickly in spite of the relative safety of the Forex market.
About the Author
Jim Pretin is the owner of http://www.forms4free.com, a service that
helps programmers make an HTML form
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