How to Trade Currency Successfully

By: Anne Durrell

If you are interested in getting in on the exciting world of foreign currency trading, you need to know several fundamentals before you'll know how to trade currency with any success. It is an exciting, sometimes thrilling, sometimes scary ride that carries big risks and big rewards. Here are a few things you need to know up front.

How Currency Trading Differs from Other Trading

Currency trading takes place between two traders, not through a central, regulated exchange like the New York Stock Exchange. But it usually works well, because forex traders have to compete with each other and cooperate with each other. The reputable forex traders in the U.S. are members of the National Futures Association (NFA), and they agree to binding arbitration if there is a dispute. You should only trade currencies through a firm that is a member of the NFA, particularly when you are learning how to trade currency.

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Additionally, there isn't an uptick rule with currencies, which means you don't have to enter a short sale at a price higher than its last trade. With stocks, this is a way to keep investors from adding to the downward momentum of a stock that is falling. But with currencies, short sell at will if you think a currency's going to spiral downward. If you make a trade based on something you overheard from a bank CEO on the elevator and it pays off, nobody will charge you with insider trading.

Currency Pairs that are Traded

When learning how to trade currency, you may wonder about trading unusual currencies, like the Norwegian Krone. While you may find some currency dealers who include exotic currencies, most will trade in the following seven currency pairs, which are the most liquid currencies in the world. They are: Euro/U.S. Dollar; U.S. Dollar/Yen; British Pound/U.S. Dollar; U.S. Dollar/Swiss Franc; Australian Dollar/U.S. Dollar; U.S. Dollar/Canadian Dollar; and New Zealand Dollar/ U.S. Dollar. These currency pairs can be split and recombined differently, to make pairs like British Pound/Yen or Euro/British Pound. Variations on these pairs make up 95% of all foreign currency trading.

The Carry Trade

Carrying of currencies depends on the interest rate attached to the currencies. The interest banks are set by a country's central bank, such as the Federal Reserve in the U.S. and the Bank of England in the UK. The object of the carry trade is to go long in a high interest rate currency, and finance the purchase of that high interest rate currency with a currency that has a low interest rate. It makes sense: finance a purchase using the lowest interest rate possible, just like you would with your home or car. A few years ago, a very popular carry trade was the New Zealand Dollar/Yen. New Zealand's rates were high: 7.25%, and Japanese rates were 0%. That means that by going long on the New Zealand dollar (buying a lot of them) would get you 725 (7.25x100) basis points just on yield. Suppose you could set up a margin account with 10:1 leverage. Even without the capital going up in value, you would clear an astonishing 72.5% annual return based solely on the difference in interest rates between the New Zealand Dollar.

There are many other things to learn about how to trade currency than what is enumerated here. Until you are skilled in reading the market signals, it is best to stick to a practice account so you don't risk losing money because of ignorance of the market. I wrote a guide you may be interested in reading: online trading canada and online mortgage broker

How To Trade Currency

currency trade

How to Trade Currency Successfully

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