Foreign exchange is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are executed in currency pairs; for example, the Euro Dollar and the U.S. Dollar (EUR/USD) or the British Pound and the Japanese Yen (GBP/JPY). The FOReign EXchange Market (FOREX) is the largest financial market in the world, with a volume of more than $2 trillion daily. This is more than three times the total amount of the stocks and futures markets combined. Unlike other financial markets, the FOREX spot market has neither a physical location nor a central exchange. It operates through an electronic network of banks, corporations, and individuals trading one currency for another. The lack of a physical exchange enables the FOREX market to operate on a 24- hour basis, spanning from one time zone to another across the major financial centers. This fact—that there is no centralized exchange—is important to keep in mind as it permeates all aspects of the FOREX experience.
Which currencies are being traded?
Any currency backed by an existing nation can be traded at the larger brokers. The trading volume of the major currencies (along with their symbols) is given in descending order: the U.S. Dollar (USD), the Euro Dollar (EUR), the Japanese Yen (JPY), the British Pound Sterling (GBP), the Swiss Franc (CHF), the Canadian Dollar (CAD), and the Australian Dollar (AUD). See Table 1.1. All other currencies are referred to as minors and those from smaller countries, exotics. FOREX currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency. (The “CH” in the Swiss Franc acronym stands for Confederation Helvetica.) A FOREX transaction is always between two currencies. This often confuses new traders coming from the stock or futures markets where every trade is denominated in dollars. The price of a pair is the ratio between their respective values. Pairs, crosses, majors, minors, and exotics are terms referencing specific combinations of currencies
What Tools Do I Need to Trade Currencies?
A computer with a reliable high-speed connection to the Internet, a small grubstake, and the information in this book are all that is needed to begin trading currencies. You do not even need the grubstake to practice on; a free demo account is offered by all retail FOREX brokers. In fact, I encourage you to open at least one demo account early in this book.
What Does It Cost to Trade Currencies?
An online currency trading account (a micro-account) may be opened for as little as $1! Mini-accounts start at $100. Do not laugh—micro- and mini accounts are a good way to get your feet wet without taking a bath. Unlike futures, where the size of a contract is set by the exchanges, in FOREX you select how much of any particular currency you wish to buy or sell. Thus, a $3,000 grubstake is not unreasonable as long as the trader engages inappropriately sized trades. FOREX mini-accounts also do not suffer the illiquidity of many futures mini-contracts, as everyone essentially feeds from the same interbank currency “pool.” Market maker brokers take their expenses and profit by marking up the bid-ask spread. ECN brokers charge a flat lot fee to trade. As an example, if you buy and then later sell 100,000 EURUSD and the spread is two pips, you pay a total of four pips or approximately $40. ECN lot fees vary from $15 to $40 for a 100,000 lot. If you trade a larger lot size and/or frequently you will be able to negotiate these costs