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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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