So What Is Online Currency Trading
Most Australians have had a holiday overseas. Part of the process is to exchange their Australian dollars to the local currency (such as Hong Kong Dollars). There are two dilemmas when doing this:
- Who should I buy the currency through (ie to get the lowest fees)
- When should I buy the local currency (ie when I book the trip or when I arrive at the destination)
This actually is almost exactly the same as forex trading.
The first step above is what a trader goes through when deciding what forex broker to go for as each have different costs (called spreads and fees).
The second step above is trying to work out when to buy an overseas currency from a base currently (such as an Australian dollar) but in this case, also when to exchange the currency back.
Advantage 1 – Time Needed To Trade
Currency movements normally are relatively low compared to Cryptocurrency and even shares. It’s not rare for example to see movements between the Australian Dollar (AUD) and US Dollar (USD) of less then a percent a day. What makes these small movements interesting is leverage.
What Is Leverage
Leverage is when the forex broker you use effectively gives you a loan based on the deposit you make. So for example, if a forex broker offer 100:1 leverage and your deposit is $1,000, you can trade up to $100,000 on currency markets. This amplifies any movements into substantial profits or losses.
How Leverage Reduces Trading Time
With forex brokers offer leverage up to 500:1 a small movement of just 0.2% could mean doubling your trade of losing the entire amount. This effectively means that unlike share trading which even a short-term trade is normally for a few days, currency trading can be just for a few minutes or hours. A forex trader can easily enter and exit markets at time-frames that suit them. Also forex markets are open 24 hours, 5 days a week adding added flexibility.
Advantage 2 – Trading Has Moved Online
These days foreign currency trading is no longer the sole bailiwick of the large international players. The rise of the Internet has seen strong growth in currency trading online, which has enabled individual investors to obtain direct market access through Electronic Communication Networks (ECNs). As a result, trading has become accessible to even relatively small individual investors through forex trading platforms such as MT4. At the same time, the number of brokers offering currency trading online to these individual investors has sharply increased.
The main purpose in trading foreign currencies is to make money. Some large players profit to the tune of millions of dollars in currency trades. But such trading brings with it major risks. If a currency suddenly turns against the trader and moves markedly in the “wrong” direction, equal amounts of money can be lost. Investors are therefore advised to use the services of a reputable broker who will act as the agent in the transaction and attempt to execute the order according to the trader’s instructions.
Advisers suggest investors first set up a “demo” account to see how the system works and what would happen if they were using real money. In this way, too, they will be able to check out the credentials, services and advice offered by the broker. Investors will also want to look to brokers for help in using tools to help reduce the risk in trading and allow them to profit in both rising and falling markets. In addition to trading on the spot market, they might want to use futures, options or betting on spreads, for example.
Advantage 3 – Few Regulations Exist
No central trading market exists for currency trading online. Brokers can become members of the National Futures Association, which provides arbitration in the event of a dispute. But few regulations exist such as those on a stock exchange. Players can short trades whenever they wish, no rules apply as to how high or how quickly a currency can rise or fall, and there are no limits on how much one person can spend on trading currencies.
Because it is so large, the foreign exchange market is the most accessible and the most liquid in the world. Whereas a buyer may sometimes be prevented from buying a stock because there are no willing sellers, the foreign exchange market is always active and trading is always possible as long as the markets are open. In a sense a trader is buying a whole country as opposed to a single stock in a company. Some traders use fundamental and technical analysis to track the trends in a country to try to determine which way the country’s economy might move and what impact that might have on the currency. Factors such as inflation and interest rates become important determinants.
Advantage 4 – Traders Choose The Currency Pairs
Whereas on the stock market it is usual to buy shares in one stock, on the foreign exchange market all trading is conducted in pairs, usually expressed in a currency’s standard abbreviation. The first currency in the pair is the base currency. Forex trading Australia between the Australian dollar and the U.S. dollar would be expressed as AUD/USD, for example. Among the major currencies that are traded are EUR/USD (euro-U.S. dollar), USD/JPY (U.S. dollar-Japanese yen), GBP/USD (British pound-U.S. dollar) and USD/CHF (U.S. dollar-Swiss franc). The foreign exchange quotes generally include a bid price, which is the price at which a market maker agrees to buy the base currency, and an ask price, which is the price at which another market maker agrees to sell the currency. The difference between the two is called the spread. Relatively small movements in a currency’s price can lead to big gains or losses.
Most currency trading online is conducted in “pips,” which are equivalent to a hundredth of 1 percent. So a bid price might be, say, 1.5162 and the ask price 1.5168. The difference is one of the ways in which the broker makes money. Traders will be expected to pay a margin, or down-payment, up front to cover any losses that might occur. In currency trading online, the system will check the available margin before acting on a trade.
Advantage 5 – Currency Trading Can Produce Measurable Profits Or Losses
Currency trading online, with its availability, accessibility and liquidity, can be highly rewarding, offering opportunities to make large amounts of money as currencies change constantly throughout the day and night. The risks are commensurate, so advisers suggest that you use only money you can afford to lose when trading currencies.
Signing up for currency trading online is as easy as signing up to buy and sell stocks. The main difference is that a foreign exchange dealer will likely ask you to sign a margin agreement.