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Currency Trading

Currency Trading

Currency trading – consisting of a multi-trillion dollar a year and approximately $2 trillion per day industry - does not take place on a regulated exchange and is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes.  The Forex market or Foreign Exchange – which is purely a speculative market - is the most liquid market in the world and depends on nothing more than a metaphorical handshake – by a computer.  There is no physical exchange of currency that ever takes place. All FX trades exist as simple computer entries and involve spread betting.

There is no uptick rule when trading the Forex market and there are no limits on the size of position so a Forex trader could sell $100 billion worth of currency if they had the capital to do it. There is no such thing as insider trading in the Forex market. The Forex market trades 24 hours a day - from 5pm ET Sunday to 4pm ET Friday and is the most accessible market in the world.  

Forex brokers are dealers that assume market risk by serving as counterpart to trades by Forex traders. Forex dealers make their money from the bid-ask spread. The bid price is that which the dealer is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the dealer is willing to sell the base currency in exchange for the counter currency. The difference between the bid and ask is referred to as the spread. Once a currency trade price clears the cost of the spread of the Forex dealer, there are no additional fees or commissions for the trader. 

Currency trading pertains to trading pips which stands for ‘percentage in point’. Currency prices are quoted to the fourth decimal point and a change in that fourth decimal point is called 1 pip and is typically equal to 1/100th of 1%.
 

The purpose of the Forex market is to facilitate the exchange of one currency into another for multinational corporations that need to trade currencies continually. Of all trades made on the FX market, 80% are purely speculative trades that have been made by large financial institutions, multi-billion dollar hedge fund firms and individual traders. These trades are made by those expressing their opinions on ongoing economic and geopolitical events.

Terms used when trading the Forex market are minimal. Alternative terms used by FX traders are as follows:
U.S. dollar: greenback, buck.
GBP or British pound: cable, sterling and pound.
Swiss franc: Swissie.
Canadian dollar: loonie, the little dollar.
Australian dollar: aussie.
New Zealand dollar:  kiwi.

To establish a position, the spread is a determining factor and since prices are always quoted using five digits, the final digit is referred to as a pip. The difference from the final digit is the cost of trading the position.  This means that, from the initiation of a Forex trade, the trader needs to recover the initial pip difference, to just break even. Trading forex provides a very high degree of leverage and when trades are placed; the system will automatically calculate the funds necessary from the FX traders account for current positions and will check for margin availability before executing any trade.
 

June 2012


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