Page 7 - Ultimate Guide to Currency Trading

What Is Currency Trading?

Currency trading (also called FX trading and Forex trading) is when you buy and sell the money of the
different countries of the world. It is a form of trading similar to buying stocks and mutual funds, only
the actual investment vehicles are digital money. You can trade this money or currencies with an
independently owned retail account, much like an online brokerage account.

The preparation you would take to make a trade in the FX markets is similar to the research
you would make for a stock purchase. You would spend time reading brokers’ reports, seeking out
information from websites, and looking at technical charts.

The difference between stock and FX trading is that with stock trading you are betting that a
company will increase in perceived value against the perceived value of others stocks, and therefore
the other people in the stock market will pay a higher price for your small slice of that company
(represented by shares of stocks). With currency trading you go about buying or selling the relatives
value of one country’s home money in relation to another country’s home money. In stock trading, a
company must have a good (and you hope increasing) stream of income to rise in value against it
peers. FX trading is different. In order for the money of one country to rise in value against another
country’s money, there has to be a wider mix of positive news and expectations.

Traders going long on currency (placing bets that the money will rise relative to another)
usually look for a combination of rising interest rates, increased positive economic activity, political
and social stability, and the home country’s debt levels. Other considerations include commodities
demand, and that country’s central banking stance and comments. Lastly, a currency trader will
consult brokerage reports for an opinion, and consult a chart for technical indicators.

The mechanics of currency trading are also a bit different from stock trading. With stock
trading you are usually allowed a 1.5:1 to a 1.75:1 ratio of leverage. This means that if our account has
a balance of $10,000, a brokerage house will allow you to buy and trade an additional $5,000 to
$7,500 worth of stock. This would bring your possible trading position size to $15,000 - $17,500 all
while having only $10,000 worth of your actual cash in your account.

With currency trading, the leverage ratios are much higher. Most FX brokerage firms allow you to
trade with leverage ratios of 10:1 up to 50:1. With this kind of leverage you would be able to trade
$100,000 to $500,000 worth of currency with a cash balance of $10,000 in your account.

Don’t let the availability of the high margins in currency trading make you say “No” to
getting started in FX. You can learn to use the margin in your account safely by limiting

ALERT position size, and using automated take-profits closing triggers. These can be used to
keep your FX losses to a minimum and your gains to a maximum!