Trading Foreign Exchange – A summary guide to Forex / FX and Currency Trading
We all use currency every day, whenever we buy something we pay with money, in our own currency. So far so good.
Normal FX/Currency Trades.. that we don’t think of as trading:
Lets assume it’s the summer and now we want to go on holiday (lets assume we live in England, maybe to the US so we buy some USD $ so we can spend them when we get there. We pay for them with Sterlign (GBP £). We have a great holiday, then when we get home we have some extra USD $ in our wallet. So what do we do? Well we can either keep them (maybe we’ll go back, or we’re lazy, or we like the look of them?), or we can go and sell them (the USD $) back for Sterling (GBP £).
Now do you think the bank/broker/money exchange with give us the same price as when we bought them.. of course not.. the prices will have changed (due to .. well many reasons.. interest rates, inflation, macro and micro economic factors).
Ok imagine that nothing else had changed and the true price was the same.. well they still wouldn’t buy them for you at the same price as they sold them to you.. Oh no.. they charge a “bid-offer”. This is their comission.
So when you go on holiday, and decide to buy and sell money, you are in fact doing currency trading. Most people don’t think about this, and don’t have much of a choice.. but maybe you can see that you do..
Other Options for you:
- Pay on your credit card, and settle it at the fx rate your credit card gives you.
- Buy and hold the USD $ you need.
- Open another bank account and keep the USD $, there.
This is what big companies do day in day out, deciding when to buy and sell, when to hold, when to invest (go long),and when to sell (go short).
So now, what if you’re part of a family, and one wants to go to the USA, and others to Hong Kong, and another to New Zealand.. ok.. so now you can see it gets a bit complicated.
So what are the FOREX / FX Markets?
These are the Markets where FX is traded, usually in real-time, where people, companies and traders buying one currency and sell another). IIt is one of the biggest trading markets in the world, with people trading for hedging, short term profit, investment, speculation.
Ok.. so far so good.. it now gets a bit complicated but keep reading and reviewing and we know you’ll get there. At the end of the day, if you think something will be worth more in the future, you want to invest in that (buy it), if you think it will be worth less you want to sell it. But trading the FOREX / FX markets is more complicated than this.
Some points to look into:
- People can trade currency right now – the spot market
- People can trade currency in the future – forwards and futures
- People can trade options and other derivatives linked to the FOREX markets.
- Quotes – Currency is quoted in pairs – ie USD/GBP
- Consider what is the base currency – usually USD , but sometime GBP – check the quote direction
- Dealing charges
- Bid-Offer Spreads
- Minimum holding time
- Maximum holding time
- Interest – (if you have GBP in a bank account you would earn interest wouldn’t you..)