Currency Pairs As The Trading Instrument
If you’ve heard anything at all about the foreign exchange market, it’s probably that it is the largest money market in the world, at least re daily trading volumes. To be absolutely certain, the forex market is unique in many respects. The volumes are, indeed, huge, implying that liquidity is ever present. It also operates around the clock six days each week, giving traders access to the market any time they need it.
Few trading limitations exist – no daily trading limits down or up, no limitations on position sizes, and no requirements on selling a currency pair short.
Selling a currency pair short means you’re expecting the price to decline. Because of the way currencies are quoted and because currency rates move up and down all the time, going short is as common as being long.
The majority of the action occurs in the major currency pairs, which pit the U.S. Dollar (USD) against the currencies of the Eurozone (the Western european countries that have adopted the EU Dollar as their currency), Japan, Great Britain, and Switzerland. There’s also lots of trading prospects in the minor pairs, which see the U.S. Greenback traded against the Canadian, Australian, and New Zealand dollars. On top of that, there’s cross-currency trading, which directly pits 2 non-USD currencies against one another, such as the Swiss franc against the Japanese yen. Altogether, there are anywhere from 15 to 20 different currency pairs, depending on which forex brokerage you deal with.
Most individual traders trade currencies thru the Net through a brokerage firm. Online currency trading is typically done on a margin basis, which allows individual traders to trade in larger amounts by building on the amount of margin on deposit.
The leverage, or margin trading ratios, can be very high, sometimes as much as 200:1 or bigger, meaning a margin deposit of $1,000 could control a position size of $200,000. But trading on margin carries its own rules and requirements and is the background against which all your trading will take place. Leverage is a two-edged blade, intensifying gains and losses equally, which makes risk control the key to any successful trading system.
Before you ever begin to trade, in any market, make sure you’re only risking money you can stand to lose, what’s ordinarily called risk capital. Risk management is the key to any profitable trading plan. Without a risk-aware strategy, margin trading can be an extremely short-lived endeavour. With a correct risk plan in effect you stand a much better chance of surviving losing trades and making winning ones.
Felix Richman is an FX trader and reporter on subjects like forex robots, and popular FX software packages like FAP Turbo.
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