Currency trading, foreign exchange or forex as it’’s more commonly known, has fast become one of themost popular markets for private traders in recent years.
As its name suggests, it involves buying and selling foreign currency. The most commonly traded
currencies are referenced against the US Dollar and are sometimes referred to as a “currency pair”
even though you are only trading one instrument. For example, the GBPUSD is the UK Pound/US Dollar
pair. A value of 1.7625 would
mean that the one Pound is worth 1.7625 Dollars. Other popular pairs include the Euro (EURUSD), the
Swiss Franc (USDCHF) and the Japanese Yen (USDJPY) although there are others.
So unlike shares and futures, you don”t have a mass of markets to choose from, but there is variety
within forex currency trading to give you a range of markets to trade.
The value of each pair differs slightly but the minimum movement - called a “pip” - is worth
approximately $10. The GBPUSD has been averaging 100-150 pips per day
which would be $1000-1500. Many brokers let you trade half or even quarter-size lots which are useful
when you”re starting out. Also, many brokers offer a demo account so you can practice before risking
real money.
The total value of the forex market is worth trillions of dollars per day, far larger than shares or
futures. It is also a truly international market with dealing
taking place all around the globe 24 hours per day from Monday to Friday. You can, therefore, trade
at any time of the day or night at times to suit you. It’’s worth noting, however, that the bigger
moves generally occur during the US and European trading sessions.
You can sell short forex just as easily as you can buy and brokers offer highly-leveraged accounts
too - but the same warning regarding margins apply here as well.
Brokers tend not to charge a commission for trading forex and you will often see adverts for
“commission free” trading. However, they make their money on the spread which is the difference
between the buying price and the selling price. The spread is usually between 3 and 5 pips although
some brokers may offer a 2 pip spread on some pairs, and some less-popular pairs may have a larger
spread.
Paying on the spread is particularly useful when trading mini lots. A 3-pip spread on a quarter lot
will be about $7.50 whereas on a full-size lot it would be $30.
Again, the spread is more important when trading short time frames where you”re only aiming to make a
few pips per trade. You need to build the spread into your trading system so you don”t overestimate
the amount you might make per trade.
One interesting aspect of forex currency trading is that there is no central clearing house where
absolute prices are quoted, unlike shares and futures. So it’’s quite possible to see different
brokers quoting slightly different prices for the same pair. As the market has become more efficient,
this difference has reduced,
in most cases, to a few pips but it highlights the importance of checking that the data you are using
for analysis is the same - or close to - that used by your broker for placing your orders.
The market you decide to trade will depend on many things, not least of all, your budget, but also
how many markets you want to look at and what hours you want to trade. There are trading vehicles to
suit all preferences and pockets.
ForexGen serves both private and institutional clients. We have a strong commitment to maintain a
long term relationship with our clients.
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