Fubarrio Expat Trader

Forex Trading

Forex Trading involves the buying and selling of sovereign currencies against the value of another countries currency. This is typically done in a foreign exchange market.

Forex Positions

While theoretically one could trade forex using cash, most forex traders rely on significant amounts of leverage when placing bets in one of the currency crosses (what a currency pair is called when trading against one another). The leverage in the forex position enables the trader to accelerate his or her gain or loss in the position taken.

Currency Pairs

Positions are taken by betting that one currency will gain or lose value in relation to another currency. An example of a currency trade might be ‘going long the EUR/USD’. In this example, the two currencies in the cross are the Euro and the US Dollar. As the currency pair is quoted, the EUR, or first fx symbol denotes the long position, or the position that the speculator wishes to increase in value. The ‘increase’ in value is registered as relative to another measure — in this case the other measure is the US Dollar.

Forex Quotes

As of today, the Euro/USDollar cross is quoted in the vicinity of 1.2665. Different quoting platforms will provide different levels of detail in regards to the price quotes, some delayed, some real time. However, most of the quotes will come across with four digits past the decimal point. A move in one of the numbers up or down of the least significant numbers in the quote is called a ‘pip’. So, by way of example, a move from 1.2656 to 1.2557 would be an increase of one pip.

Forex Brokers

Forex houses, and forex brokers often advertise that they charge “no-commission”. So the obvious question is: how do they make their money?

Apparently it is two ways.

Bid Ask Spreads

The first, and most obvious is that they create a spread between the bid and ask on a given currency pair. The more popular the given currency pair is for trading positions and the more common providers of liquidity to that market are, the more likely the trader will receive a favorable entry price. Typically, common currencies can get down to 3 pips or less between quoted currencies. However, some of the more obscure currency crosses can have large bid and ask spreads and be very difficult to shift positions quickly at a profit because of the huge spreads being offered on these.

Margin Leverage and Interest Rates

The second way forex brokerages make money is through interest on a position. If and when a trader holds a leveraged position in an fx account, he is in effect borrowing the money. While it’s often possible that the open trade is being balanced by another open trade on the books of the broker and the broker is net even with the exchange, they seldom to never disclose this fact. So while a trader could control a million dollars worth of GBP or pounds sterling with as little as 1% of the cash in his account to cover this trade, the interest on the holding period will accumulate quite quickly. In addition, some brokers charge higher interest rates for more esoteric or obscure currencies.

Forex Trading Software

Forex trading software has transformed the industry in recent years and made currency trading available to a vast number of new traders who access real time quotes and a trading platform via the world wide web. The subject of forex trading software, equities trading software, and commodity trading software is complex and worthy of it’s own section to go over the pluses and minuses that I’ve found in my experiences with each of them. I will build this out over time and also leave room for readers to add their own comments on what their favorite trading platforms are. In most cases it will come down to what you are personally comfortable with and what kinds of securities you need to trade, what ancillary analytical tools you need to have at your disposal and in what volume that will determine your best choice.