Currency trading is great for people who follow the news. You don’t have to be worried about when the beige book is coming out, when housing starts and jobless numbers are being released, and you also don’t have to be concerned with a company and how it relates to the prevailing domestic economy. The only thing you have to know is how a country is doing today, and have a pretty good understanding of the underlying political climate. That said, people new to trading would likely want to start with currency, and perhaps that sounds cavalier, but as there is hardly any opportunity for an insider trading market, it is one of the cleanest ways to partake in trading. Trading is the investment markets, however, is not easy, and getting prepared is very important. Also understanding basic trading strategies, like arbitrage and the carry trade, are all-too-important to your eventual success.
Currencies trade on a market called the Forex. This is the largest investment market on the planet, and it is growing larger by the day, and so as to understand how large it is, in 2010 the Forex had over $4 trillion in average turnover, and the NYSE had $25 billion in daily volume. The reason the market is growing is because the internet, and better trading platforms, have introduced several new buyers into this space that was once almost exclusively occupied by professional traders.
Aside from watching the international news of the countries where their currencies trade on the Forex, the other thing every investor can do is familiarize themselves with some basic trading strategies. Arbitrage sounds very sophisticated, and it actually is, but when it comes to buying one currency on one exchange, where because of market hours, the currency has not had a chance to catch up with the constantly fluctuating exchange rate, and sell it on an exchange where it has is a smart way to profit. Not as easy as it sounds, but it can be done. That said, the most popular trading tool is the carry trade.
Currency carry is the most popular trade in the currency market. These trades rest on the fact that every currency traded has an associated interest rate. The central banks in each country set these rates, and as a result this is straightforward strategy: go long with the highest interest rate currency, and finance the purchase of that currency with a currency that carries a lower interest rate. Declines can be severe, and happen quite quick however, so you must monitor positions and news closely when using this advanced technique. Just remember that when you want to sell, mostly everyone else does as well; be vigilant.
How Currency Trades
Currency is traded in lots, with a micro lot being 1000, a mini lot is 10,000 and a standard lot is 100,000. All currency is always done in pairs, and unlike in the stock market where you can buy or sell a single stock, in the Forex market you have to buy one currency in order to sell another. Just about all currencies are priced out to the fourth decimal point, and a PIP (percentage in point) is the smallest increment of trade. A PIP is represented as 1/100th of 1%.
Finding a platform on which to trade currency is important. Some of the things you want to look for is an educational area on the website of the firm you are considering. You also want to consider if they have different trading platforms, and a mobile platform is always key. AlfaTrade is a good example of a site with multiple trading platforms as well as news, education, and ease of opening a new account. There is support and assistance for those interested in trading currency, important features indeed. Read this AlfaTrade review to find out more on this broker.