Currency Trading for Beginners
Every once in a while a good trade idea can lead to a quick and exciting pay-off, but professional traders know that it takes patience and discipline to be
TABLE OF CONTENTS
Currency trading means buying and selling currencies on a market. Currency, foreign exchange and currency market are all synonims and they are used interchangeably. On such markets you can not only sell but also bet on the price movement of currency pairs.
So, if currency is so big, why have so few people heard of it?
The simple answer is you have probably used the currency market before, either directly or indirectly. Any time you take a trip to another country and exchange money, you just made a currency trade.
Whenever you buy something in a shop that was made in another country, you just made a currency trade. You paid in your own currency and the manufacturer was paid in a different currency.
The first currencies brokers came on stage in the mid 70's to offset a significant customer foreign exchange business for medium and small banks, which needed continuous exchange rates in the major currencies.
Initially, the foreign exchange brokers installed direct lines to all the banks willing to participate. Generally, a major bank made a rate and the brokers showed the rate to all the banks at about the same time. The first bank to deal on the rate completed a transaction. The others waited for the next rate. Any bank could make a rate - show a bid or an offer. Soon, with the aid of new technologies, the brokers became quite sophisticated and efficient at putting together a continuous two-way price and using the banks as their primary liquidity providers. Beside currencies, numerous other CFD products came into the online trading market.
People trade currencies all the time, but how can currency be an investment?
Here's a simple example. Imagine that you took a trip from the United States to Europe in 2002. For the trip, you changed your US dollars into euros. At the end of a trip, you typically would change any extra euros back into US dollars. But what if you didn't?
In 2002, one euro was worth about 90 US cents ($0.90). Say that you decided to hold on to 500 euros, and left them sitting in your desk drawer for 5 years. In 2007, you took your euros to the bank and sold them for a 2007 price of $1.40. Since you bought the euros for $0.90 and sold them for $1.40, you made a $0.50 profit per euro. You would have made $250 just because you held on to those euros and had bought and sold at the right time. That's a 55% return in 5 years.
The $4 trillion currency market mostly runs on the same idea. Many of the world's giant banks, hedge funds, and insurance companies actively trade currencies as a way to make money. Since they do so in very large amounts, they record profits and losses in the millions every day for the smallest fraction-of-a-cent movements in exchange rates.
Many have not heard of the currency market because the market has historically been largely exclusive to industry professionals. The average person could buy a stock but couldn't trade currencies. So it remained solely in the hands of the big boys.
Things have changed
Like the online stock trading revolution of the 1990s, the Internet has brought currency trading within reach of the average person sitting at home.
Thousands of individual traders around the world can now trade currencies from their living rooms, with nothing but a computer, an Internet connection, and a small trading account.
You can now make trading and investment decisions to buy and sell British pounds or Japanese yen at any time, day or night (Sunday through Friday). This brief guide will show you how. But first, it's important to know why you should trade currency.
Why Trade Currency?
Online currency trading has become very popular in the past decade because it offers traders several advantages.
- Currency never sleeps: Trading goes on all around the world during different countries' business hours. You can, therefore, trade major currencies any time, 24 hours per day, 5 days a week. Since there are no set exchange hours, it means that there is also something happening at almost any time of the day or night.
- Go long or short: Unlike many other financial markets, where it can be difficult to sell short, there are no limitations on shorting currencies. If you think a currency will go up, buy it. If you think it will fall, sell it. This means there is no such thing as a "bear market" in currency–you can make (or lose) money any time.
- Low Spread cost: Most currency accounts trade without a commission and there are no expensive exchange fees or data licenses. The cost of entering a trade is the spread between the buy price and the sell price, which is always displayed on your trading screen.
- Unmatched liquidity: Because currency is a $4 trillion a day market, with most trading concentrated in only a few currencies, there are always a lot of people trading. This makes it easier to get in to and out of trades at any time, even in large sizes.
- Available leverage: Because of the deep liquidity available in the currency market, you can trade currency with considerable leverage (up to 30:1). This can allow you to take advantage of even the smallest moves in the market. Leverage is a double-edged sword, of course, as it can significantly increase your losses as well as your gains.
- International exposure: As the world becomes more and more global, investors hunt for opportunities anywhere they can. If you want to take a broad opinion and invest in another country (or sell it short!), currency is an easy way to gain exposure while avoiding vagaries such as foreign securities laws and financial statements in other languages.
"A currency's value will fluctuate depending on its supply and demand, just like anything else."
Currencies trade on an open market, just like stocks, bonds, computers, cars, and many other goods and services. A currency's value will fluctuate depending on its supply and demand, just like anything else. If something increases supply or lowers demand for a currency, that currency will fall. For example, when Greece threatened to default on its debt, it threatened the existence of the euro, and investors around the world rushed to sell euros.
With a sudden dramatic rise in the number of euros for sale and a definite lack of demand for them, the euro dropped precipitously against the US dollar and other currencies.
The best thing about currency is that you can buy or sell at any time and in any order. So, if you think the eurozone is going to break apart, you can sell the euro and buy the dollar. If you think the Federal Reserve is printing too much money, you can sell the dollar and buy the euro.
There are around 180 currencies in the world. However, activity is concentrated into six ‘major’ currency pairs, which account for around two-thirds of the total turnover.
Those Majors are:
EURUSD USDJPY GBPUSD AUDUSD USDCHF USDCAD
The main feature of day trading is that the purchasing and selling of securities occur within the same trading day. This means that all trading positions are liquidated at the end of a trading day. The main goals of day trading are discovering and leveraging short-term market inefficiencies.
The Bid price is the price the market is willing to pay for a certain currency pair. The Ask price is the price it is prepared to sell at.
For example, in a USD/CHF quote of 1.1650/1.1655, the bid is 1.1650, while the offer is 1.1655.
The difference between the bid and ask is known as the spread.
Currency brokers will quote you two different prices for a currency pair: the bid and ask price. The difference between these two prices is known as the spread. Also known as the “bid/ask spread“. The spread is how “no commission” brokers make their money. Instead of charging a separate fee for making a trade, the cost is built into the buy and sell price of the currency pair you want to trade.From a business standpoint, this makes sense. The broker provides a service and has to make money somehow.
How is the Spread in Currency Trading Measured?
The spread is usually measured in pips, which is the smallest unit of the price movement of a currency pair.
For most currency pairs, one pip is equal to 0.0001.
Currencies pairs are traded in specific amounts called lots. The standard size for a lot is 100,000 units of currency, and now, there are also
mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units.
So for instance, when buying one micro lot on the GBP/USD, you would buy 1,000 British Pounds and sell an equivalent amount of US Dollars.
Let's suppose the current exchange rate for GBPUSD is 1.3000 and you want to buy 10,000 US Dollars’ worth of this pair. Here is the calculation:
For pairs with USD as the quote currency, take the dollar amount you want to purchase and divide it by the exchange rate:
(desired position size) / (current rate) = amount of units
10,000 US Dollars / 1.3000 = 7,692.31 units of GBPUSD
As you can see, this is approximately 7.6 mini lots of British Pounds rounded down.
Buying a pair with USD as the base currency is much easier to calculate, because in these cases you just buy the number of units you want because you are purchasing US dollars, the base currency. In the case of a cross pair transaction, when buying 10,000 US dollar worth of GBPCHF, for instance, we purchase 7,692.31 units of GBPUSD at the above rate and sell 10,000 units of USDCHF.
When looking at the future, many traders will have an opinion on where a currency is going. If a trader is optimistic and thinks a currency will rise, he is said to be "bullish". If the trader is negative and expects a currency to fall, he is said to be "bearish". Every day, the bulls and the bears do battle and the price moves as one or the other gets the upper hand.
Our job as currency traders is to look at the currencies available to us and to buy the strongest while selling the weakest. So, if after reading the news you became bearish of euros and bullish of US dollars, you could trade that opinion by selling euros and buying US dollars.
Because you are always comparing one currency to another, currency is quoted in pairs. This may seem confusing at first, but it is actually pretty straightforward. Below is an example of a EUR/USD quote. It shows you how much one euro (EUR) is worth in US dollars (USD).
If you, instead, wanted to look at the euro in terms of the Japanese yen (JPY), you would look at the EUR/JPY rate. If you wanted to see the value of a US dollar in Canadian dollars (CAD), you would look at the USD/CAD.
The first currency in a currency pair is the "base currency"; the second currency is the "counter currency". When you buy or sell a currency pair, you are performing that action on the base currency. So, if you are bearish of euros, you could sell EUR/USD. Now, when selling EUR/USD, you are not only selling euros, but are buying US dollars. If you are more bullish on the Japanese yen than you are on the US dollar, you could sell the EUR/JPY instead. It's all up to you.
Let's say that you sell EUR/USD at 1.4022. If the EUR/USD falls, that means the euro is getting weaker and the US dollar is getting stronger. Say the EUR/USD falls to 1.3522. In that case, you would have a profit. If it rose to 1.4522, you would have a loss. So just remember: if you sell a pair, down is good; if you buy the pair, up is good.
BUY EUR/USD at 1.4022
Down = Loss Up = Profit
SELL EUR/USD at 1.4022
Down = Profit Up = Loss
But I don't have any euros. How can I sell them?
You can buy or sell anything you see active on your trading station, even if you don't have any of that currency. When trading currency, you are speculating on the change in rates. You do this by borrowing the euros. This is standard for most currency traders. This also allows you access to leverage, which can increase your profits and your losses.
So, let's look at the example again. When you sell EUR/USD, you borrow 1,000 euros and sell them to someone else in the market, earning the equivalent in US dollars. Say you did this while the EUR/USD is at 1.4022. In that case, you borrowed 1,000 euros, sold them for $1,402.20, and held on to those US dollars.
Two weeks later, you sold those US dollars when the rate was 1.3522. Since the EUR/USD price has fallen, you get more euros back at the end than you borrowed. So, you return the 1,000 euros you borrowed, and the remaining €36.98 is your profit to keep. If the price had risen to 1.4522 instead, that €36.98 would instead be a loss. Your trading station will do the math for you and apply the profit or loss directly to your account.
Buy currencies that are going up. Sell currencies that are going down.
Find the best pair to do that with.
A pip is the unit you count profit or loss in. Most currency pairs, except Japanese yen pairs, are quoted to four decimal places. This fourth spot after the decimal point (at one 100th of a cent) is typically what one watches to count "pips". Every point that place in the quote moves is 1 pip of movement. For example, if the EUR/USD rises from 1.4022 to 1.4027, the EUR/USD has risen 5 pips.
"Stock indices have 'points', futures have 'ticks', currency has 'pips'."
The monetary value of a pip can vary according to the size of your trade and the currency you are trading. BLUESUISSE demo accounts typically trade in increments or "lots" of 10,000. A pip in a standard demo account in EUR/USD is worth $1.00 per lot. If you were trading 3 lots, you would have 3 pips of profit or loss per pip the EUR/USD moves, and, therefore, $3.00 of profit or loss.
FOR EXAMPLE: The EUR/JPY pips are valued in Japanese yen. USD/CAD pips are in Canadian dollars, and so on. Once again, your trading station makes it all easier by doing the math for you.
Leverage trading simply means that you are permitted to trade many times the size of your margin deposit. This is primarily attributed to the higher levels of liquidity.
For instance, a leverage of 1:20 means, in order to buy and benefit from one lot of 10,000 US dollars you only have to commit your 500 dollars, the rest of the amount is leveraged by the broker.
Leverage is a both way instrument: on one hand, it lets traders profit from a lot size much larger than their investments, but on the other hand, it exposes them to losses of equal magnitude. You can win or lose quicker - that's right - but that's not all, too small leverage can be equally dangerous.
The most effective way to manage the risk associated with leveraged trading (also called margin trading) is to diligently implement risk management in your trading plan.
As mentioned before, all trades are executed using borrowed money. This allows you to take advantage of leverage. Leverage of 20:1 allows you to trade with $10,000 in the market by setting aside only $500 as a security deposit. This means that you can take advantage of even the smallest movements in currencies by controlling more money in the market than you have in your account.
While leverage can be advantageous in increasing your profits, it can also significantly increase your losses when trading, so it should be used with caution. Start trading in small sizes so that you don't take on too much risk.
Leverage is a double-edged sword.
Sold 3 lots of EURUSD at 1.2175 and bought them at 1.2110:
In this example, the client made 65 pips * 3 lots = 195 pips in total profit (as he sold at a higher price than he bought). The pip value for EURUSD is US $ 10, so the total profit =195 pips * US $ 10 per pip = US $ 1,950.
Bought 2 lots of USDJPY at 105.60 and sold them at 105.20:
In this example, the client made 40 pips * 2 lots = 80 pips in total loss (as he sold at a lower price than he bought). The pip value for USDJPY is 1000 JPY and this equals 1000 / 105.20 (price of USDJPY when the position was closed) = US $ 9.506 approximately, and so the client total loss = 80 pips * US $ 9.506 per pip = US $ 760.46.
Sold 2 lots of EURGBP at 0.7015 and bought them at 0.6940:
In this example, the client made 75 pips * 2 LOTS = 150 pips in total profit. The pip value for EURGBP is 10 GBP and this equals 10 * 1.8500 (assuming the price of GBPUSD was 1.8500 when the position was closed) = US $ 18.50, and so the total profit is 150 pips * US $ 18.50 per pip = US $ 2775. There are three main types of charts used in technical analysis:
Technical analysis is another method of forecasting prices. It studies past price action in an attempt to predict the future. The technical analyst focuses exclusively on market information and works on the assumption that all fundamental information is already reflected in the price. Unlike the fundamentalist, the technician attempts to predict future price directions by searching for established patterns of price behaviour that have signalled major movements in the past. Charts are the major tool in technical analysis.
Technical Analysis: Charts
There are three main types of charts used in technical analysis:
Line Chart: The line chart is a graphical depiction of the exchange rate history of a currency pair over time. The line is constructed by connecting daily closing prices.
Bar Chart: The bar chart is a depiction of the price performance of a currency pair, made up of vertical bars at set intraday time intervals (e.g. every 30 minutes). Each bar has 4 'hooks', representing the opening, closing, high and low (OCHL) exchange rates for the time interval.
Candlestick Chart: The candlestick chart is a variant of the bar chart, except that the candlestick chart depicts OCHL prices as 'candlesticks' with a wick at each end. When the opening rate is higher than the closing rate the candlestick is 'solid'. When the closing rate exceeds the opening rate, the candlestick is 'hollow'.
So, you now know what currency traders do all day ( and all night! ). Seems pretty simple, right? Buy rising currencies and sell falling ones.
You've already taken the first step by learning what currency is. Now it's time to try it. Start with a demo account. It's a free simulation of a real trading account. It has all the functions of a real account (streaming currency prices, pip, P/L, charts, etc.), but the money isn't real. Think of it as test driving a car.
SIGN UP FOR A DEMO ACCOUNT (LINK HERE)
Once on the demo, you'll start to get a feel for how it all works. You can start buying the currencies you think will rise and selling the ones you think will fall.
But how do you know which currencies will rise and which will fall?
Over the years, currency traders have developed several methods for figuring out how far currencies will go.
➤ Fundamental Analysis: Since currencies trade in a market, you can look at supply and demand. This is called fundamental analysis. Interest rates, economic growth, employment, inflation, and political risk are all factors that can affect supply and demand for currencies.
➤ Technical Analysis: Price charts tell many stories and most currency traders depend on them in making their trading decisions. Charts can point out trends and important price points where traders can enter or exit the market, if you know how to read them.
➤ Money Management: An essential part of trading. All traders need to know how to measure their potential risks and rewards and use this to judge entries, exits, and trade size.
There are several important skills needed in order to become a currency trader. And like all skills, learning them takes a bit of time and practice. We have grouped all these needed skills together into an interactive trading course. You can learn how to analyze and trade the market from experienced instructors and traders. They teach using video-ondemand lessons and live office hours are available so you can get personal feedback, study on any schedule, and learn at your own pace.
And the best part is it's free. All you need to do is show that you're serious about getting into the world's largest market. Open a live trading account with BlueSuisse and you will become a real trader with real money. You'll have unlimited free access to the course, as well as tool such as charts, research, and trading signals.
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