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Trading Articles
Wednesday 15 October 2008
Small traders have shied away from currency trading because of their account size or the belief that the market is only for big corporations or financial institutions. This is certainly not the case.
With the technology advancements in recent years, market moving news and prices readily available to all participants - small or large, margin FX is now an ideal trading arena for the private trader.
So here's some pre-qualifiers of whether FOREX markets might suit your trading profile.
· Are you looking to trade the most liquid market available?
· Are you looking for a highly leveraged market?
· Are you looking to trade a market where, under normal market conditions your stops are guaranteed?
If you answered yes to any or all of the above questions, then Foreign Exchange trading may just be the thing for you.
OVERVIEW
The FX market is the world’s largest market by virtually any measure. However, unlike a stock market or a futures market, the foreign exchange market is not located in any single place. Rather, transactions occur via phone/computer screens, between Brokers, Market Makers and Banks. It’s what’s referred to as an over-the-counter market.
The market starts trading at 7am on Monday morning (out of NZ)and closes on Saturday morning, tying in with 5pm Friday New York time. Throughout the day, Asia comes on at around 10am (Sydney time), followed by Europe at 4pm, and New York at 10pm. In terms of activity, the Asia/Pacific time zone is the quietest, with activity picking up when Europe comes in and reaches fever pitch when the US join in.
PRIVATE TRADERS JOIN THE GAME
As the cost of broadband internet continues to slide, a lot more private traders are able to access live quotes, charts and news at little or no cost.
In addition to technology advancements, financial products have developed. Following the introduction of futures and CFDs, the Margin FX product has been developed to allow smaller private traders to enter the foreign exchange market with having to deposit hundreds of thousands of dollars into a trading account. In fact, you can trade Margin FX with an account size of around $20,000.
BEGINNERS CORNER
Quoting Foreign Exchange Rates
An exchange rate is a price: the price of one currency in terms of another.
The minimum movement in a currency cross is call a pip or point. For example, the AUD/USD is quoted to 4 decimal places, 0.7570. As such, a move from .7570 to .7571 will be 1 pip, while a move from .7570 to .7670 is called a big figure.
Currency rates are always quoted in a two-way price (Bid/Ask), showing the trader at which price they can buy or sell.
For example, the AUD/USD would be quoted as: 7570/7575, which means that the trader is able to buy AUD/USD at .7575 (ask price), or sell at .7570 (Bid price).
FOREX TRADE SCENARIO
The AUD/USD is trading at .7500 as such we look to go Long $100k AUD/USD at .7505 on-stop.
We then place a stop-loss at .7479, and a take profit at .7555.
Accordingly, we are risking 21 pips (.7505-.7484), to make 50 pips (.7555-.7505).
Given that each pip is worth $10, we are risking $210, to make $500.
Commission on Margin FX is charged in pips per side. Normally, this charge is 3 pips (approx.$30) per side.
Now lets assume the market rallied higher, and we took profit on our long position at .7555.
The profit on the trade is calculated as follows:
Entry: Bought $100k AUD/USD at .7505, plus 3 pips commission, means you are long from.7508
Exit: Sold $100k AUD/USD at .7555, less 3 pips commission, means you sold at .7552
Total Profit: 44 pips (.7552-.7508) or US$440.
Now, lets see what would happen had we been stopped out at .7484:
Entry: Bought $100k AUD/USD at .7505, plus 3 pips commission, means you are long from.7508.
The market breaks below the support at .7500, turning sentiment negative. As the selling pressure grows, we are stopped out of our long position at .7484.
Exit: Sold $100k AUD/USD at .7484, less 3 pips commission, means you sold at .7481.
Total Loss: 27 pips (.7508-.7481) or US$270
FOREIGN EXCHANGE PRODUCTS
Spot: refers to the exchange rate of a currency that is for settlement in 2 days time. The spot rate is agreed upon today, between the buyer and seller and the trade is settled in 2 banking days. This is the main product traded in the foreign exchange markets and the one both private and institutional traders are involved in.
Forward: refers to the exchange of currency to be settled anytime after the spot date. This product is mainly used by exporters/importers, allowing them to fix their exchange rate today, for future settlement. This can also be used by private traders/speculators looking to take advantage of interest rate differentials between 2 currencies.
Factors Influencing Exchange Rates
As with any other market, currency movements are caused by supply and demand factors, such as:
· Imports
· Exports
· Lending activity
· Political considerations
· Speculative trading
· Market sentiment
· Technical Analysis
· Commodity prices
· Interest rates
· Capital Flows
Margin Foreign Exchange
As mentioned earlier, to allow private traders to enter the biggest market in the world, brokers have developed the Margin Foreign Exchange product thereby allowing clients to trade foreign currencies on margin, similar to futures, CFDs and shares. For example, to buy $100,000 AUD/USD the trader only needs to have a 3% deposit to trade the AUD/USD. In this example, the margin would be $3000 ($100,000 x 3%). Each 1 pip movement is worth $10, per $100,000.
For more information on trading FX markets please email matt.kirk@stonebridgegroup.com.au>
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