Currencies were traditionally the domain of
businesses, institutional investors, and hedge
funds, but online trading has now made it available
to individual traders. Currency is the fastest moving
and most liquid kind of trading. It far surpasses
the speed and volume of equities. Currencies are
traded on the the ‘foreign exchange’ or forex.
The overall forex market sees average daily volumes
of more than $3.2 trillion.
48
This is four times more
than all the equity and futures markets combined.
About 20% of those trades come from businesses
that need to move money from one currency
to another to conduct international business.
Speculative traders account for the remaining
80%.
49
The forex market has incredibly exible hours as
different countries around the globe open and
close. New York begins at 1pm GMT and closes at
10pm. But Sidney starts at 10pm GMT and then
Tokyo opens at midnight. London opens at 8am
GMT, just one hour before Tokyo closes and the
cycle continues. Currency trading desks set their
own hours, but many are open 24 hours a day 5
days a week, closing only for the weekend from
Friday evening until Sunday evening.
167
The most active trading occurs when two markets
overlap. For example, London and New York
overlap for four hours between 1-4 pm GMT. At this
time the USD, EUR, GBP are most actively traded.
London and Tokyo only operate together for the
last hour of Tokyo and the first of London trading.
Trading strategy includes timing. Some traders
choose the extra activity of multiple markets and
the beginning and closing hours of the London or
New York markets. Others prefer the calmer times.
In order to trade currencies, you need to know
the terminology used. It’s a bit different than that
used for equities. And some of the terms are used
differently.
Ask: Also known as offer rate. This is the price you
agree to buy the currency and the foreign currency
agent agrees to sell it. In currency trading, this is
not negotiable.
Base Currency: In a currency pair, the first currency
is the base currency. So in the EUR/USD, the euro
is the base currency as it is mentioned first. When
you buy to open a trade, the base currency is the
one you are selling or going ‘short’ If you are trading
on margin, this is the currency you are borrowing
against to buy the quote currency.
Bid: Also known as the buy rate. This is what you
can sell your currency for. Your foreign currency
exchanger will buy your currency at this price.
Again, there is no negotiation because the spread
is where the currency agents make their profit.
Carry Trading: Currency trading is designed to
take advantage of the difference in interest rates
between two currencies. Usually this is a longer
term strategy. Even without price fluctuation,
13.1 Terminology
48
‘Trading Basics You Should Know’, XE http://www.xe.com/currencytrading/basics.php
49
Schlossberg, Boris ‘Top 7 Questions About Currency Trading Answered’, Investopedia 3 May 2017 http://www.investopedia.com/articles/forex/06/
168
the trader can make money on the difference in
interest rates.
Counter Currency: The second currency in a pair
that is also called a quote currency because the
price quoted is the amount one unit of the base
currency can buy of the counter currency. When
you buy to open the trade, this is the currency you
are buying or going ‘long’.
Currency Pair: Currency trades are always shown
as pairs: USD/GBP or EUR/JAP. When you buy to
open a trade, you are selling the first and buying
the second.
Exchange Rate: Also called the FX rate, or foreign
exchange rate. This is listed as decimals out to the
fourth place. This tells you exactly how much a
unit of your base currency will buy of the counter
currency. For example, in the GBP/USD pair, the
exchange rate could be 1.2545.
Pip: Also called a point, is an abbreviation for ‘price
interest point’. This is the smallest unit of trading
and is usually .0001 or 1/100 of 1%. One exception
is the Japanese yen which is only calculated out
two decimal places. So in trading the yen, a pip is
.01.
Rollover: The money your trade gains or loses when
kept overnight. It is derived from the difference
in the interest rates of the underlying countries
and is typically listed as a rollover, overnight, or
carry fee on your trading platform. As you increase
your leverage, this amount increases as well. The
rollover could be positive or negative depending
on the pair you’re trading and if you are in a buy
or sell position.
Spot Price: The current price for a currency pair.
Spread: The difference between the bid and ask
price.
169
Currency pairs also have their own terminology.
Currencies are traded most commonly in seven
different pairs.
Major Pairs are any trading pairs that have the
United States dollar (USD) on one side of the pair.
Major pairs include any variation of these pairs
regardless of which currency is the base currency.
About 95% of all speculative trading occurs in these
pairs:
• EUR/USD (euro)
• USD/JPY (Japanese yen)
• GBP/USD (British pound)
• USD/CHF (Swiss franc)
Commodity Currencies come from countries that
rely on commodities for much of their exports.
These commodity currencies are also included in
the majors:
• USD/CAD (Canadian dollar)
• AUD/USD (Australian dollar)
• NZD/USD (New Zealand dollar)
Crosses are trades that do not involve the USD.
Sometimes these are traded to take advantage of
different interest rates in longer term carry trading.
These might be:
• EUR/GBP
• CHF/JPY
• AUD/CAD
Exotic currencies are traded with much smaller
volumes and typically are more costly to trade but
can sometimes see much larger swings. These
involve currencies such as:
• Russian ruble (RUB)
• South African rand (ZAR)
• Singapore dollar (SGD)
• Polish zloty (PLN)
Currency trading is high-risk trading. Trade only
with money you can afford to lose. It can be
170
exciting and profitable, but it can also quickly wipe
out your account. Be cautious of leverage that also
increases your risks.
Many beginning traders fail because they fail to
plan. Trading on a hunch is no more than gambling.
When you develop a strategy, you increase your
chances for successful trades. Most professional
traders say that each person must develop their
own strategy. It’s helpful to look at how others
trade, but your strategy will ultimately be uniquely
your own.
Here are six factors that will go into your trading
strategy.
1. Time of Day: You will want to develop a
consistent time to trade. Currency markets have
patterns based on the time and the markets that
are open. Trading is more active when two large
markets, like London and New York, are open
at the same time. Decide if you want the fast
movements of this time or the slower movements
of mid-market times. When both the US and British
markets are open, the trades move more pips and
the spread is smaller.
50
2. Technical Analysis: Some traders depend
almost entirely on charts and chart patterns to map
out currency swings. They look for historical cycles.
Others use very little technical analysis, perhaps
just enough to find support and resistance lines to
guide them on when to enter and exit the trade.
Focusing on chart patterns alone lets traders enter
multiple currency markets as the patterns may be
similar across many charts.
50
Mitchell, Cory, ‘Best Time to Day Trade the GBP/USD Forex Pair’, the balance 14 Oct 2016 https://www.thebalance.com/best-time-to-day-trade-the-
13.2 Getting Ready to Trade
171
3. Fundamental Analysis: In currencies this means
looking into the ‘health’ and financial well-being
of the country behind the currency. They check
employment numbers, debt, consumer spending,
import/export, government reports, and other
resources. All these give traders indications to help
them determine if a currency is strengthening or
weakening against another currency.
4. Interest Rates: This can be one of the biggest
movers of currency. Often the Federal Reserve or
central bank will give us helpful hints to prepare
the market for interest rate changes. This helps the
market factor them in more gradually. But some
countries are willing to shock the market. However,
sometimes a country will signal that there will be
no changes expected in interest rates… and then,
BANG! Change the interest rates to shock the
market.
Each night a trader keeps the trade open they
incur a rollover or a carry rate. This can be positive
or negative depending on the difference in interest
between the currency pair. The central banks set
the interest as a way to heat up or cool down the
economy. Carry trading is a kind of currency trading
that takes advantage of the short-term interest
rate difference. A trader goes long in a currency
rate with high interest and finances it with the sale
of a currency with low interest.
For example, in 2005 the New Zealand economy
was roaring, but the Japanese economy was
stagnant. Traders who traded the JPY/NZD earned
7.25% annual return. Traders harvested 725 pips,
or basis points, in yields or carry charges alone,
regardless of how the currency moved. However,
as the currency interest rates start to equalise,
traders may rush for the door causing a drop in
the selling currency price.
172
5. News Events: Currency traders keep an ear
tuned to the latest news events. Government
reports, politics, even a presidential tweet can
twitch the market. On 15 January 2015, the Swiss
National Bank (SNB) suddenly decoupled the Swiss
franc from the euro. It caused the Swiss franc (CHF)
to rally 23% in a matter of moments. It bankrupted
several currency trading firms and rocked the
financial world. This is why the news is so vital to
traders. And it reminds traders how speculative
and risky trading can be. Even with a stop loss
order, the price may drop so quickly you will not
be filled at your requested price, but at something
lower.
In currency markets, there is no such thing as ‘insider
trading’. Any news is legal news. Hear a tip from
your golf buddy who works in the central bank? You
are free to use it. Traders who focus on news and
fundamentals more often stick to a few currency
pairs so they can keep up with all the information.
6. Enter and Exit Plans: Your strategy will also
include when you will enter a trade and when you
will leave it. Currency trading is high-risk trading.
You can and will lose money sometimes. But you
may protect your assets with carefully formulated
stop loss and limit order settings.
Many traders recommend you set your stop loss
with enough room to stay in the trade in minor
uctuations, but not to risk too much capital. Some
advise you to place the upside limit with a greater
spread than the downside. So if you set your stop
loss at 30 pips, you may want to set your limit order
to sell at a profit at 90 pips. This way your winning
trades will give you three times as much as your
losing trades. Trades like this let you absorb three
losses for every one win and still come out ahead.
Of course, if you set your limit order too high, it
may never be reached before the market turns.
This is where your support and resistance lines
173
guide you to the best entry and exit positions.
You may also find an online forex risk/rewards
calculator very handy. You put in your buy price
the stop you set, and profit target and it will give
you the risk/reward ratio.
While each trading platform is different, walking
you through the process of making a trade can
be useful. By now you know all trading involves
risk. Only risk capital you are prepared to lose and
that past performance does not guarantee future
results.
Here are the steps using eToro’s platform. Let’s say
you have decided to trade USD/CHF. You check
your watchlist and see it’s actively trading and
trending down right now.
You go to the chart and check your support and
resistance. You want to buy just after support and
sell just before resistance. So you set up your trade
and set your stops. This chart has three places
where you could have entered the trade at support
and exited near resistance.
You decide to enter a buy position at 1.0052. You
decide to set your stop loss at the resistance line of
1.0043. Support is at 1.0075, but you decide to set
it a little under support at 1.0070 to grab profits if
it turns before the top. That gives you an upside
of 20 pips and a downside of 7 pips minus the
spread. You’ve checked the fee schedule and know
the spread is 3 pips.
You click the plus or minus tab, or just click on the
amount and change it to the amount of money
you want to trade. You choose your leverage rate.
As you click on the leverage tab, it will give you
the different amounts of leverage you can use,
13.3. How to Make a Trade
174
from no leverage (1x) from no leverage (1x) up to
as high as 400x on some currencies, which is an
incredibly high risk. As you put in your amount and
leverage, your preset stops and limits will update
automatically.
Go in and click on them to set the limits you’ve
chosen. You can choose a dollar amount, or you
can choose a percentage. If you decide you are only
willing to take a 5% loss, you will set your stop loss
at 95%. If the value of your trade drops below 95%,
it will trigger the sale. On the other side, you may
preset a 10% profit point. Simply type in the rate
‘1.10’ and the platform will convert that to a dollar
amount that takes into account your leverage.
Then simply click the open trade button. When you
trade with preset exit points, you take the emotion
out of the trade. You let the market make its little
swings without panic. You’ve chosen the maximum
loss you’re willing to risk against the hoped for
gains. Either the trade will trigger a win or a loss.
You are free to focus on your next trade.
Because much of the profit in currency trading
is made in pips which are only .0001 unit (dollar,
pound, euro), it’s easy to want to magnify those
profits by using large amounts of leverage. After
all, if you trade $5000 and make a 20 pip profit, it
might total only about $10. But if you leverage it
by 10x, that’s $100 and if you leverage it by 100x,
that’s $1000. Now you’re making money.
The downside is that you run the real risk of losing
money as well. That $5000 trade could equally
cost you 2% to 20% of your equity. What are some
ways to reduce risk while increasing the chances
for profits?
13.4 Controlling Risk
175
• Start trading with lower leverage and work up as
you master your strategy
Eliminate emotion from the trade by setting exit
points, both stop loss and take profit orders.
Use discipline in your trading. Create your strategy
and trust it. Many traders bail out of a trade too
soon and lose out. Others let their losses mount
up in the hope things will change for the better
Stick to your plan.
Don’t get married to your trade. It is not a
reection of your intelligence. It’s a trade. Exit
it when you planned. Be very cautious about
adjusting the stops.
Use expendable money. You will feel less emotion
when you don’t bet the farm and you trade with
money you can afford to lose.
Visualise the full amount. You may only be trading
with $500. But if you have leveraged it to $5000
or $50,000, think and feel like you are controlling
the entire amount. This is real money. While you
may only have $500 invested, you are accountable
for the full amount.
• Make sure your trading platform is regulated
by a major oversight authority. This way you are
assured of greater transparency.
As you begin currency trading, remember these
basic methods to help you toward more profitable
trading. Currency trading always involves risks. You
can feel more confident as you take it step-by-step.
1. Understand how and why currency moves.
Spend time seeing the correlation between interest
rates, news events, the fundamentals and technical
13.5 Tips for Currency Trading
176
analysis, and how your chosen currency moves.
The best traders are always learning.
2. Start with one trading pair. Spend time just
trading one pair. Learn to see the patterns and
thoroughly understand the news surrounding it.
Which reports make the currency move? Your
depth of knowledge in one currency pair and the
skills you develop are more likely to help you see
patterns and entry points you might miss if you
dilute your focus.
3. Keep a diary of your trades. Why did you
enter the trade? Write down the date and time you
entered the trade. Record your entry points and
exit points, both stop loss and limit order. Record
the results. Why did you exit? Did you follow your
strategy? Jot down notes and reminders of things
you learned from this trade.
4. Set your limit order so you have more upside
gain than you will lose if you are stopped out. That
way, even if you only succeed 50% of the time, you
will still be ahead. Don’t be unrealistic about the
upside gains.
5. Technical analysis may reinforce the trade or
be a self-fulfilling prophecy. Every trader sees the
same charts you look at. They are setting the same
support and resistance lines. When they begin to
react to the market, it creates a volume of traders
all acting in the same pattern.
6. You won’t make money on every trade. You’re
going to lose some. Accept it with ease. The less
emotional you can be about both wins and losses,
the more control you will have in your trading.
7. Choose a reputable trading platform. Look
for one that is easy to use, trades the markets that
you want to trade, and has reasonable transaction
costs. An active community of investors on the
177
forums can help answer questions and guide your
trading decisions. Traders who allow you to follow
them can jumpstart your trading.
Currency trading can be exciting and profitable.
It offers tremendous liquidity and exible trading
hours. The higher leverage offered by different
brokers allows you to make quicker profits than
most other markets while being mindful of the
risks. Know the risks and don’t trade money you
can’t afford to lose. When you look at successful
currency traders on eToro you will see the capital
they put at risk in balance with the earnings they
gain.
Your capital is at risk. Past performance does not guarantee future results. This information is for educational purposes and not investment advice.
178