Trading money in the global markets can be a great way to make more of it, but beware that it also can be a lesson in how to lose money quickly. More than $5 trillion is traded every day on the foreign exchange market (Forex), and yet no centralized headquarters or formal regulatory body exists for this form of trade. London is the largest trading center, but New York, Tokyo, Hong Kong, and Singapore are important trading centers as well.
Forex is regulated through a patchwork of international agreements among countries, most of which have some type of regulatory agency that controls what goes on within their respective borders. Thus, Forex actually is a worldwide network of traders who are connected by telephone and computer screens.
Because more international policing of money trading has occurred in recent years, authorities have had some successes exposing scams and frauds that victimize traders, especially newer ones, but a lot of fraud is still out there. So if you want to jump into this wild world of trading, you still need to be wary. Don’t depend entirely on what we discuss here in this chapter to make your decision to start trading currency. Sure, we explain the workings of foreign exchange markets and how the language of the Forex market and its risks are unique, but you need to do a lot more training before you ever consider entering this extremely risky trading arena.
Exploring the World of Forex
If you’ve ever traveled outside the United States, you’ve probably traded in a foreign currency. Every time you travel outside your home country, you have to exchange your country’s currency for the currency used in the country you’re visiting. If you’re a U.S. citizen shopping in England, and you see a sweater that you want for £100 (100 pounds — the pound is the name of the basic unit of currency in Great Britain), you’d need to know the exchange rate. In early 2017, for example, the rate was $1.24268 U.S. for £1 (one pound). So a £100 sweater would cost you $124.27 in U.S. dollars.
We include this example here to show you how Forex is used by the average shopper, but foreign currency traders trade much larger sums of money thousands of times a day. The majority of trades take place in five countries: the United Kingdom, the United States, Singapore, Hong Kong, and Japan. These five centers of currency trading handle 77 percent of Forex trading. As the United Kingdom moves out of the European Union as part of Brexit, these trading centers could change.
Currency trading is ongoing, 24 hours a day, with some countries just getting started as others are finishing up their business day. For example, when the trading day opens at 8 a.m. in London, the trading day is ending for Singapore and Hong Kong. When New York opens its trading doors, it’s already 1 p.m. in London. Thus, traders must be alert around the clock, because a major event at an off hour anywhere in the world can shake the markets at any time.
Individual trades in the range of $200 million to $500 million are not uncommon. The Triennial Central Ban Survey of 2016 estimates that approximately $5.1 trillion are traded every day. In fact, its estimates indicate that quoted price changes occur as frequently as 20 times per minute, and the most active currency rates can change as many as 18,000 times in a single day.
Types of currency traders
Traders can be grouped into one of four basic types: bankers, brokers, customers, and central banks. Each plays a different role in the Forex market:
Bankers, banks, and other financial institutions do the lion’s share of trading. They make profits buying and selling currency to each other and their customers. Approximately two‐thirds of all Forex transactions involve banks dealing directly with each other.
Brokers or dealers sometimes act as intermediaries between the banks, helping them — or other traders looking for a good deal — find out where they can get the best currency trade. Buyers and sellers like working through brokers or dealers because they can trade anonymously through intermediaries. Brokers make profits on currency exchanges by charging a commission for the transactions they arrange.
Customers, which primarily are major companies, trade currency so they can operate globally or invest internationally. For example, if a U.S. car manufacturer buys parts from a manufacturer in Japan, then the U.S. car manufacturer needs to buy and pay for the parts in Japanese yen. Companies that trade currencies regularly have their own trading desks, whereas others conduct their currency trading through brokers or banks.
Central banks, like the U.S. Federal Reserve, that act on behalf of their governments, sometimes participate in the Forex market to influence the value of the currencies of their respective countries. For example, if the Federal Reserve believes the dollar is weak, it may buy dollars and even encourage central banks of other countries to do the same in the Forex market in order to boost the value of the dollar.
Why currency changes in value
Among the many factors that impact the value of a nation’s currency are
Business cycles
Changes in tax laws
Inflationary expectations
Interest rates
International investment patterns
Policies adopted by governments and central banks
Political developments
Stock market news
Traders must monitor all these potential factors so they can stay on top of political or economic changes that impact the value of the currencies they hold. Currency trading, like other forms of trading, is affected by the basic economic principle of supply and demand. When a whole bunch of one type of currency is available for sale, the market can be flooded with it, and the price of that currency drops. When the supply of currency is low and the demand for it is high, then the value of that currency rises. Governments or through their central banks influence the value of their respective currencies by flooding the market whenever they want the value to fall or by making the supply scarce (by buying their own currency) whenever they want the value to rise.
What traders do
Currency traders look for a currency that offers the highest return with the lowest risk. For example, if a nation’s financial instruments, such as stocks and bonds, offer high rates of return with relatively low risk, then traders who are foreign to that nation want to buy that currency, thus increasing the demand. Currency is also in demand when its country is going through a growth segment in its business cycle highlighted by stable prices and a wide range of goods and services available for sale. Forex traders who speculate on the values of currencies to earn their keep look for specific signs to indicate when exchange rates may change, including the following:
Political instability: Unrest in a country drives up demand for currency in safer markets, such as U.S. dollars, as speculators race to find safe havens.
Rising interest rates: Higher interest rates encourage foreign investments in countries where native investors are seeking better rates of return than they can get at home.
Economic reforms: Economic reforms in developing countries may help improve their currencies. As a result, investors see new opportunities for investing in the currencies of those successfully developing countries.
Traders try to predict these moves in advance so they can get in or out of a currency before others. Correctly guessing where a currency is going and taking a position in that currency at the beginning of the trend can mean huge profits for a trader. Traders make money either by buying the currency at a lower price and then selling it later at a higher price or by selling their holdings in currencies of other countries at higher prices before they have time to react negatively to improvements in the first currency. After the markets for their original holdings fall, they simply reestablish positions in them at bargain prices.
When a trader purchases a large amount of a particular currency, then he or she is long on the currency. Conversely, when a trader sells a large amount of a currency, then he or she is short on the currency.
The Forex market is dominated by four currencies, which account for 80 percent of the market — the U.S. dollar, the euro, the Japanese yen, and the British pound. These currencies always are liquid, which makes finding someone willing to buy or sell any of them easy for traders. Other currencies are not as liquid, and as is true with the stocks of small companies, you’re sometimes unable to find any buyers or sellers when you’re ready to trade for the currency of a smaller country. Currencies of developing countries are softest, usually facing lower demand than the currencies of developed countries. Soft currencies at times can be difficult to convert.
Understanding Money Jargon
The world of Forex has a language of its own. Prices are quoted two ways, meaning that when traders talk price with each other, they state their respective prices in terms of what exchange rate they’ll pay to buy the currency and what they’ll take when selling it. Bid and ask price differences, or spreads, usually are stated in pips, or a small fraction of a currency unit.
Pips are the most common incremental price movement quoted in the currency market. Some brokers quote in an even smaller measurement called pipettes. Although most transactions deal in thousands (individuals) or millions (interbank) of dollars, yen, euro, or other currencies, and a pip spread can equal thousands of dollars, most currency price quotes nevertheless are extended out four decimals (1.5432, for example). There are exceptions, such as the yen and nonmajor currency pairs that may be quoted to two decimal places. Many times traders quote only the last two digits, or the small numbers (such as 32 exchange for 22), because the incremental changes are so small that only the last two digits matter.
As a trader, you need to think in terms of the host currency when receiving a quote for direct exchange, which is an exchange based on the value of the host country’s currency. For example, quotes given to traders on the CME Group (formerly three separate exchanges: Chicago Mercantile Exchange, Chicago Board of Trade, and NYMEX) are based on the U.S. dollar because it’s the host currency for the CME Group. You can see how that exchange works at www.cmegroup.com. Quotes for indirect exchange are just the opposite. They’re based on the foreign currency for which you’re seeking a trade rather than on the host currency. For example, if you’re in the United States and receive an indirect price quote, you’d be getting a price based on buying a set amount of foreign currency in exchange for U.S. dollars. Most exchanges take place on the interbank market — currency exchanges among the world’s banks — and are based on the U.S. dollar.
Traders use three different types of trades to exchange currency. They’re known as spot, forward, and option transactions.
Spot transactions
Spot transactions account for about a third of all Forex transactions and involve trades in which two traders agree on an exchange rate and then trade currencies based on that rate. These transactions usually start with one trader contacting another and asking for a price on a particular type of currency without specifying whether he or she wants to buy or sell. The trader on the receiving end of the call gives the caller a two‐way price — one if he or she wants to buy and the other one if he or she wants to sell. If they agree to do business, the two exchange their respective currencies.
Forward transactions
Traders use forward transactions when they want to buy or sell currency at some agreed‐upon date in the future. A buyer and a seller set an exchange rate for the transaction, and the transaction occurs at the set price at the appointed time, regardless of what the current market price is for the currencies. Forward transactions can be a few days or even years in the future, although most futures contracts have standardized expiration dates depending on when you enter the position. The two types of forward transactions are futures and swaps:
Futures: These are forward transactions that have standard contract sizes and maturity dates. These types of transactions are traded on an exchange set up for this purpose.
Swaps: These are private contracts through which two parties exchange currencies for a specific length of time and then agree to reverse the transaction at a later date, which is set at the time of the initial contract.
The risk that traders take in using forward transactions is that market rates can change, turning the contract to which they’ve just agreed into a losing trade. They still have to fulfill the contract at the fixed price because the price can’t be revised after the contract is signed.
Companies that place orders for products from foreign firms usually use forward transactions so they can lock in an exchange rate at some time in the future when their orders are ready. Companies placing these orders don’t want to lay out the cash upfront to exchange currencies, but they nevertheless want to be able to budget set amounts for their purchases. As such, they’d rather risk missing a better rate for the currency exchange in the future than a major shift in the product’s price (perhaps brought on by a currency shock) that ends up costing them much more than they intended to pay.
Options
Option contracts were added to the Forex world to give traders a bit more flexibility than a forward transaction affords them. Like forward transactions, the owner of an option contract has the right to either buy or sell a specified amount of foreign currency at a specified rate up to a specified date. The big difference with option contracts is that traders who hold a contract aren’t obligated to fulfill the transaction. They can, instead, simply decide to let it expire.
Option buyers have to pay for the right to buy or sell these transactions on or before a specified date. The set price at which the currencies are exchanged is called the strike price. When the date for the exchange arrives, the option holder determines whether the strike price is favorable. If it is, the option owner completes the transaction and earns a profit, but if it isn’t favorable, the option owner allows the option to expire and absorbs the cost of purchasing the original option, which is less of a loss than actually exchanging the currencies. The two types of options currency traders deal with are
Call options: Options to buy currency at some set price in the future
Put options: Options to sell currency at some set price in the future
For example, suppose a trader purchases a six‐month call option on 1 million euros at an exchange rate of 1.39 U.S. dollars to the euro. During that six‐month period, the trader can (has the option to) purchase the euros at the $1.39 rate, buy them at market rate, or do nothing at all. As market rates for currencies fluctuate, options in those currencies can be sold and resold many times before the expiration date. Companies operating overseas use options as insurance against major unfavorable market shifts in the exchange rate and thus avoid locking their companies into guaranteed exchanges.
Trades are made using various currency symbols that are similar to the ones you need to know for stocks when seeking price quotes. Some of the more common currency symbols are listed in Table 20‐1.
You can find current exchange rates for most major currencies online at the Universal Currency Converter (www.xe.com/ucc). You merely set an amount, the type of currency you want to convert, and the type of currency to which you want to convert to find out the exchange rate and how much the set amount of your currency is worth when converted or exchanged. Although this site won’t give you a rate at which you’re guaranteed to find a trade, it certainly gives you a decent estimate of what you can expect to find to within six decimal points.
Looking at How Money Markets Work
The currency exchange market is made up of about 2,000 dealer institutions that are particularly active in Forex. Most of the players are commercial or investment banks that are geographically dispersed in the key financial centers around the world. Among these 2,000 dealers, about 100 to 200 members carry on the core trading and market‐making activities. Major players are fewer still.
When a dealer buys a U.S. dollar, regardless of where in the world the transaction takes place, the actual deposit is located either directly in a U.S. bank or in a claim of a foreign bank on a dollar deposit located in the United States. The same is true of the currency of any other country.
Different countries, different rules
The actual infrastructures of the various currency markets and how they operate are determined by each separate nation. Each country enforces its own laws, banking regulations, accounting rules, and tax codes, and each country determines its method of payment and the settlement system. Yikes! Doesn’t that mean you have to know a lot about international monetary laws to be able to trade? Yup — especially if you want to be successful.
Luckily, considerable global cooperation exists among exchange regulators, which minimizes differences and helps protect Forex traders from fraud and abuse. In the United States, the U.S. Commodity Futures Trading Commission (CFTC) sets rules and investigates any problems involving U.S. currency trades. The CFTC reaches agreements, or memoranda of understanding (MOUs), with most major nations that have active currency exchanges. These MOUs form a method of cooperation between regulatory and enforcement authorities across international borders that combats fraud and other illegal practices that can harm customers or threaten market integrity.
If you plan to become involved in Forex, be sure to visit the CFTC’s website at www.cftc.gov to bone up on your knowledge of international laws and find information about recently exposed scams and other illegal activities. You certainly don’t want to get caught up in a fraudulent deal and lose all your money.
The almighty (U.S.) dollar
The U.S. dollar is the most widely traded currency by far. Based on a Federal Reserve survey, the dollar is one of two currencies that are involved in more than 88 percent of all global foreign exchange transactions. The U.S. dollar wears many hats, serving as an investment currency in many capital markets, a reserve currency for many central banks, a transaction currency for many commodity trades, an invoice currency for many contracts, and a currency of intervention used by countries that want to influence the values of their own currencies.
Organized exchanges
The money market is largely unregulated as a defined market. By that, we mean that a commercial bank in the United States doesn’t need any special authorization to trade or deal in foreign currencies. Securities and brokerage firms don’t need special permission from the Securities and Exchange Commission (SEC) or any other regulatory body to carry out foreign exchange activities.
Transactions can be carried out based on whatever terms the law permits and using whatever provisions are acceptable to the two parties, subject to the commercial law governing business transactions. Of course, that means the money market is the closest thing to the Wild West you’ll find in the trading world. Almost anything goes. Institutions that participate aren’t inspected specifically for their exchange practices, but regulatory authorities nevertheless look into trading systems as part of their regular examinations of financial institutions, just to be sure they’re operating under the country’s commercial banking or securities laws.
Although no official rules or restrictions govern the hours or conditions of trading on this over‐the‐counter (OTC) market in the United States, trading conventions developed mostly by market participants are in place. The OTC market for foreign currency trading is any currency trading done outside the confines of an exchange, such as the CME Group. You can find out what those rules are by contacting the Federal Bank of New York, which produces and regularly updates the Guidelines for Foreign Exchange Trading Activities. These guidelines clarify common market practices and offer “best practice recommendations.” Before you become a trader, protect yourself by making sure you’re working with a dealer or a broker that follows these guidelines. You can access the most current version, revised in November 2010, at https://www.newyorkfed.org/medialibrary/microsites/fxc/files/2010/tradingguidelinesNov2010.pdf. The New York Federal Reserve regularly issues updates to the guidelines, which you can find on its website at https://www.newyorkfed.org/fxc/index.html.
The OTC currency exchange market accounts for more than 90 percent of the total U.S. foreign exchange market, including spot transactions, forwards, and swaps. If you’re new to Forex trading, starting out is much safer on an organized exchange, where you can trade currency futures and certain currency options. The Chicago Mercantile Exchange (CME) is one of the largest, and it offers excellent educational materials to help you get started. Find out more about the CME at www.cmegroup.com/education.
Organized exchanges and regulations governing them are considerably different from the OTC foreign currency market. Trading actually takes place in a centralized location rather than through a network of computers and telephones. Each of the respective exchanges regulates hours and trading practices, and their products are standardized. Organized exchanges also are equipped with central clearinghouses for payments and cash settlements.
Taking Necessary Risks in the World Money Market
Leverage, which means borrowing money to trade, is the number one risk to your portfolio when trading in Forex markets. Success on the Forex market means having to trade in large sums, because profits are made at exchange‐rate differences of only fractions of a cent. Banks or brokers determine the leverage they want to offer you, but you won’t find strict regulations like the ones that govern stock margin accounts.
After they’re approved for trading, customers are given a set amount or allowance on which they can trade on margin. A common starting allowance for trading on margin is 5 percent (see Chapter 15 for more about margin), which means that if you put $100,000 in the bank, you’re allowed to execute transactions of up to $2 million. As you gain success with more experience, that margin may be lowered to 1 percent, which means you’d be allowed to trade as much as $10 million on your $100,000 deposit.
When trading at those high margin levels, even a minor mistake can wipe out your entire deposit.
The most conservative of banks require full margin, meaning you have to deposit $1 million to be able to trade $1 million. Be sure that you understand the leverage you’re being offered and the loss potential you face if your trade goes sour. Just imagine starting with $100,000, which you can use to trade $2 million, and then losing half of that trading maximum with trades that have gone sour. You could end up $900,000 in the hole. Sure, lots of traders can come up with that — no problem. In reality, as long as you stick to trading, the major currencies’ drastic price changes that end up in that type of loss are unlikely, but a loss of 10 to 20 percent of your holding in a matter of minutes can happen. Only trading in third‐world currencies can result in losses of the million‐dollar magnitude described here, and only if the country experienced a major uprising and the price of its currency dropped dramatically.
Understanding the types of risks
You also face a number of different kinds of risk, including market risk, exchange risk, interest rate risk, counterparty risk, volatility risk, liquidity risk, and country risk.
Market risk
All traders and investors face market risk. Basically, market risk is comprised of changes in price that adversely impact your trade or investment. Market risk, which includes overall changes in the financial markets, is in play from the moment you enter into a Forex position until the moment you exit it. The foreign exchange rate can change any time during that period, so when you’re dealing in Forex, two key factors can impact the price of the currency — exchange risk and interest rate risk.
Exchange risk
Foreign exchange traders take on exchange risk (specific to the currencies in the pair chosen) the moment they buy or sell a foreign currency. Every time you take on a new foreign exchange position, regardless of whether it’s through a spot, forward, future, or option transaction, you’re immediately exposed to the potential that the exchange rate will move against your position, making it worth less than when you bought it. In only a matter of seconds, a profitable transaction can turn into an unprofitable one.
Interest rate risk
Foreign exchange positions can change in value not only because of the exchange rate but also because of the currency’s underlying interest rate. Whenever a country’s central bank (think Federal Reserve) raises or lowers the underlying interest rate for its currency, the impact on any positions you’re holding in that country’s currency can be a major one.
Counterparty risk
In the currency trading world, a counterparty is the other entity involved in a transaction — a bank or banker, a broker, or another trader. When you buy a currency option or execute a forward transaction, you risk the possibility that the counterparty to your transaction won’t be able to meet his, her, or its obligations.
Whenever you buy the option through an exchange, rather than directly from the counterparty, this risk isn’t a factor. When that happens, you run into additional replacement costs, because you’re forced to enter into another currency transaction to meet your own foreign currency needs. The key to avoiding this kind of risk is entering into contracts with known entities that have high credit ratings. Additionally, you need to investigate whether the counterparty with which you’re trading has had any problems with regulators, insolvency, or questions of ethical conduct. One good place to begin your investigation is the consumer protection section of the CFTC at www.cftc.gov/ConsumerProtection/index.htm.
When evaluating a company, you first need to consider its credit risk. You can find credit rankings for many major banks at the Standard & Poor’s website (www.standardandpoors.com). You can research a company’s creditworthiness by investigating the requirements and standards it uses when providing credit to its customers. Companies that provide easy credit to their customers run a greater risk of not being able to meet their obligations. Conversely, companies with higher margin limits definitely are safer to do business with when you’re entering into a contract.
Volatility risk
Volatility risk relates to the possibility of rapidly changing exchange rates impacting your positions in foreign currencies. As we mention earlier in the “Exploring the World of Forex” section, currency prices can change thousands of times per day. Options on currencies are valued according to volatility and underlying changes in the prices of the respective currencies. If a trader sees an increase of 100 percent in volatility, or a doubling of volatility, then the price of the option can increase 5 percent to 10 percent. If you’re trading on credit, which is highly likely, your bank or broker can reevaluate the credit it’s extending to you whenever it sees a dramatic increase in the volatility of your holdings.
Liquidity risk
Liquidity risk is not a major factor if you’re trading in the more commonly traded currencies, but if you decide to trade in less active currencies, it can become a factor when you’re unable to sell a currency you hold at the expressed time you want the sale to take place, especially when the market for that currency is not active. You can avoid liquidity risk by buying currency options or futures on an exchange.
Country risk
Country risks come in several different varieties, all of which you need to consider whenever you trade in foreign currencies. Among those aspects are
Political risk: This variety relates to the political stability of the country in whose currency you’re trading. Although we haven’t seen any recent seizures of commercial assets by any nations, it has happened in the past. For example, Venezuela took control of its oil industry by seizing assets of non‐Venezuelan oil companies. If you trade in currencies of countries that are at risk of possible destabilization, the currency you buy can become worthless if the country changes political leaders.
Regulation risk: This variety relates to what can happen after you establish a position in a country’s currency. Its government can change its regulations and, in effect, put restraints on the ownership established by your position in the currency and by the position of your counterparty — and that can get messy.
Legal risk: This variety relates to which country has jurisdiction to rule on a contract if your counterparty happens to default. Unfavorable contract law in the host country of your counterparty can end up determining that the contract is invalid or illegal, and you can lose your position. Be sure that you understand from whom you’re buying and under which country’s laws any disputes will be settled. If U.S. law won’t be the overriding law for the contract, be certain you understand contract law in the country of the counterparty with whom you’re trading.
Holiday risk: This variety relates to the possibility that the country in whose currency you’re trading has different religious, political, or governmental holidays that can shut down trading in that currency right when you need the money. Be sure you know the holiday schedules for the countries in whose currencies you trade.
Seeking risk protection
Although trading in foreign currencies often is called the modern‐day Wild West, forces are in place that can help you minimize the risks — provided you take advantage of them and trade within their boundaries. The primary monitors of foreign currency trading are the world’s central banks. They monitor the flow of money among countries and the balance of payments between governments and banking institutions. In the United States, the U.S. Treasury Department and the Federal Reserve monitor and regulate these types of transactions. Similar regulatory authorities exist in most major currency markets, but if you decide to do business with a nonbanking institution, you’re transacting your business in unprotected waters outside the safe harbor of regulatory oversight and must do so under the often fateful guise of caveat emptor: Let the buyer beware.
Internationally, the Bank for International Settlements (BIS — www.bis.org/index.htm) is the leading independent agency for evaluating foreign exchange trading institutions on a global basis. BIS created risk‐weighted evaluation and capital requirements for institutions that trade in foreign currencies and money‐market transactions. Be certain that any institution outside the United States with which you plan to conduct trades meets BIS standards.
A number of common clearing systems assist with the transfer of foreign currencies. The two best‐known ones are the Clearing House Interbank Payments System, or CHIPS, and the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. Be sure you’re using one of these systems when you trade because they code transactions to avoid defaults and help you identify the creditworthiness of transactions. CHIPS is privately owned and operated by the New York Clearing House.
If you’re trading in foreign currency futures, your risks are much less, because the futures industry is highly regulated. Clearinghouses for futures are efficient, and futures transactions usually are cleared hourly or in some cases even minute by minute.
Getting Ready to Trade Money
Your first step as a foreign currency trader is to develop an extensive collection of historical information not only about rate fluctuations for the currencies you plan to trade but also about interest‐rate fluctuations, economic history, and political stability of the countries whose currencies you’re considering. Gathering some background information about the Forex market itself doesn’t hurt either. You can find more details about trading currency in Currency Trading For Dummies, 3rd Edition, by Kathleen Brooks and Brian Dolan (Wiley).
After collecting this information, you need to consider your own trading goals and how much you want to risk. Set your risk limits before you start so you don’t get emotionally caught up in having to make these potentially disastrous trading decisions on the fly. Capital that you risk on Forex trading needs to be money that you can afford to lose without impacting your lifestyle. Do not, for any reason, use retirement savings, savings for your children’s educations, or savings required to maintain your house and lifestyle.
As is true for stock trading, when trading currencies, you need to develop a plan that determines what you trade and how much you’re at risk. When your plan’s in place, you need to stick to it for the entire trading day. You should not be developing the plan and executing it at the same time. Foreign currency trading requires a great deal of focus, and you can’t risk breaking that focus to do additional planning in the middle of a trading day. Monitor the successes you have in meeting the goals of your plan. If you’re not achieving your objectives, you may want to step back and reevaluate your plan and your decision to trade in foreign currency.
Foreign currency traders use technical analysis in a way that is similar to stock trading (see Chapters 9 and 10). Bar charts are the most common tools. The basic bar chart shows the opening, high, low, and closing prices for a given period of time.
The key difference between trading currencies and stocks is that in the foreign exchange market, a daily price chart sometimes shows the opening price in the Pacific Rim and the closing price in the United States. Because the foreign exchange market is open 24 hours a day, time periods are different for foreign currency trading than they are for stock trading. You can play with Forex charting online at https://www.dailyfx.com/charts.
We don’t cover the basics of technical analysis for foreign currency trading here because we’d need to take up another entire book to do it right. That’s exactly why John Wiley & Sons, Inc., also publishes Technical Analysis For Dummies, by Barbara Rockefeller. Be sure to check it out, too.
Because we can’t say it enough, we repeat: If you truly want to pursue this form of trading, we highly recommend that you seek additional training before you begin trading individually. You can get your feet wet by trading ETFs (exchange‐traded funds) based on various foreign currencies. For more information about ETF trading, see Chapter 14.
Understanding foreign exchange markets
Because more international policing of money trading has occurred in recent years, authorities have had some successes exposing scams and frauds that victimize traders, especially newer ones, but a lot of fraud is still out there. So if you want to jump into this wild world of trading, you still need to be wary. Don’t depend entirely on what we discuss here in this chapter to make your decision to start trading currency. Sure, we explain the workings of foreign exchange markets and how the language of the Forex market and its risks are unique, but you need to do a lot more training before you ever consider entering this extremely risky trading arena.
Currency trading is ongoing, 24 hours a day, with some countries just getting started as others are finishing up their business day. For example, when the trading day opens at 8 a.m. in London, the trading day is ending for Singapore and Hong Kong. When New York opens its trading doors, it’s already 1 p.m. in London. Thus, traders must be alert around the clock, because a major event at an off hour anywhere in the world can shake the markets at any time.
The risk that traders take in using forward transactions is that market rates can change, turning the contract to which they’ve just agreed into a losing trade. They still have to fulfill the contract at the fixed price because the price can’t be revised after the contract is signed.