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Course 1

What is Currency Trading?

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1-1 – What is FX?

  • What is FX?
  • Trading currencies in pairs
  • The FX elevators

FX trading involves buying and selling the currencies of different countries against each other. In FX trading, you always buy one currency and sell another in the expectation that the one you buy will appreciate relative to the one you’ve sold. That’s how you make a profit.

1-2 What is the FX market?

  • Where is the currency market located?
  • When and where does trading take place?
  • How do people trade without a central market?
The FX market is a virtual market. Trading takes place through computers linked all over the world. The market operates 24 hours a day, five days a week, starting in New Zealand on Monday morning and ending in San Francisco on Friday evening.

1-3 Why trade FX?

  • You can trade anytime, anywhere
  • The biggest market in the world
  • You can sell as well as buy
  • Instant execution with no commissions
  • Technical analysis works better
  • Fewer instruments to worry about
  • No inside information

The FX market is a huge, liquid market – the biggest in the world -- where you can buy and sell at almost any time. Technical analysis works as well in this market as any other. And almost nobody has access to any information that anyone else doesn’t. It’s as fair a market as exists in this imperfect world.

1-4 Who Trades FX?

  • The three major types of players: 
  1. the big banks & security companies
  2. non-financial customers
  3. “other financial institutions” (hedge funds & you)

Retail: only 6% of the marketThe FX market is made up of three major groups. The big banks and security companies that actually make a market in FX are a little less than half the market. Other financial institutions are about half – this includes smaller banks, hedge funds, and so-called “real money investors,” such as pension funds and insurance companies. Finally there are importers and exporters, but they’re a pretty small part of the market. Retail – that’s you -- accounts for only 6% of total trading. So keep that in mind:  when you trade FX, you’re trading against some pretty smart players.

1-5 – When can you trade FX?

  • Where does trading take place?
  • Tokyo sessionLondon session
  • New York sessionDifferent currency pairs are more liquid during different sessions
  • Trade smaller currencies in their regional time zonesTrading during the day
  • Trading during the week

The global trading day has a notable rhythm. Trading is broken down into three sessions:  the Tokyo session, the London session, and the New York session. Trading is most active during those periods when two trading regions are open at the same time (Asia and Europe, then Europe and the US). Currencies tend to trade more actively when their home market is open. Markets are also most active during the middle of the week; Mondays and Fridays tend to be a bit quieter.

1-6 How Currencies Are Quoted?

  • Abbreviations for currencies
  • Nicknames of currencies
  • How currency prices are quoted
  • Base currency and quote currency
  • Bid and offer in terms of base currency & quote currency
  • How professionals talk about a trade
  • Spreads

Each currency has a three-letter abbreviation. Currency trades are always quoted in pairs, with the name of the base currency – usually the larger of the two – coming first and the quote currency coming second. The pair is quoted in terms of how many units of the quote currency it takes to buy one unit of the base currency. Professionals usually talk in terms of buying and selling the currency pair, not just the quote currency. When you see a currency pair quoted, usually there are two prices given:  a rate to buy the base currency and a rate to sell the base currency. The difference between the two, or the spread, is how the market maker makes a living.

1-7 – Pips and lots

  • Pips
  • Lots
  • How much is a pip worth
  • Combining pips and lots to see how much you have at risk

A pip is the smallest whole unit that a currency can move, while a lot is the normal amount of a currency that you trade. Combining the two gives an easy way to calculate how much money you have made or lost on any day. It also allows you to see if you have enough money in your account to withstand the normal ups and downs of the market.

1-8 Kinds of Orders

  • Two kinds of orders: those to be executed now, those to be executed in the future
  • “Stopping out” of a trade
  • Take profit orderTrailing stopLimit order
  • Other kinds of orders

There are various kinds of orders that you can submit to your broker. These boil down to two main kinds:  those to be executed now, and those to be executed in the future if the market hits a certain level. The latter includes stop-loss orders and take profit orders to get you out of trades, and limit orders to get you into trades.


1-9 – Margin and Leverage

  • Margin
  • Leverage
  • Advantage of leverage: much higher rate of return
  • Disadvantage of leverage: you can quickly lose everything

Margin allows traders to put on bigger or more trades than they would otherwise be able to do. This gives them leverage. The judicious use of leverage allows traders to take the same position with much less capital and to earn a higher percentage return on their capital, or to take more different trades with the same amount of capital, thereby spreading the risk.

1-10 Kinds of Orders

  • The two kinds of brokers
  • STP brokers
  • ECN broker
  • Market makers/Dealing desk
  • Which kind is better? It depends
  • Requotes
  • Slippage
  • Re-quotes and slippage are more important than spreads

There are two main types of brokers: straight-through processing, or STP, brokers, which pass your trade on to the interbank market and take a small mark-up, and market-makers or dealing desks, which take the trade on their books. Both have their good and bad points. With both though you have to be sure that you are getting as near as possible to the actual market rate, because unscrupulous brokers are quite capable of cheating you out of a pip or two every time you trade. That adds up over the longer term.

1-11 – Margin and Leverage

  • Margin
  • Leverage
  • Advantage of leverage: much higher rate of return
  • Disadvantage of leverage: you can quickly lose everything

Margin allows traders to put on bigger or more trades than they would otherwise be able to do. This gives them leverage. The judicious use of leverage allows traders to take the same position with much less capital and to earn a higher percentage return on their capital, or to take more different trades with the same amount of capital, thereby spreading the risk.

1-12 How to Open an Account?

  • Account type
  • Registration
  • Activation
  • Hold on! Not so fast

The main steps involved in opening a brokerage account are:  fill in the paperwork, send the broker your credentials, get your log-in details, fund the account and get ready to trade! But before you jump in, consider trading through a demo account for some time until you feel confident. You’ve got to walk before you can run.

1-13 – Miscellaneous Market Terminology

  • Bulls & bears
  • Long, short & square (or flat)

A “bull” is someone who thinks the market is going up, while a “bear” thinks it’s going down. Someone who has bought an asset is  said to be “long” the asset, while someone who has sold it without owning it is “short.” Someone who has no position is either square or flat.

Risk Warning: The information contained within the Company's website is not considered as investment advice and/or investment recommendation but instead a communication that provides educational material. The Company is not responsible for any loss arising from any information herein contained. Past performance does not guarantee or predict any future performance. Those financial instruments are traded on margin and carry a high level of risk and it is possible to lose all your capital. Seek independent advice if necessary. Neither the Company nor its employees and/or associated partners are liable for any loss or damage resulting from the use of the information provided.