Basics of FOREX Currency Trading
Due to the tremendous daily turnover of international currency trading, trading in currencies has become a much larger turnover than even the most active securities markets. The high liquidity of currency trading also add to its attractiveness, as well as the ease in trading; especially since trading commissions are rarely taken since the trading is done by banks.If a person has a good financial relationship with his bank, and has the ability to have at least US$ 10,000 on deposit (a standard minimum amount in most currency trading), it is possible to trade on 'margin'; i.e. for a total transaction of around US$ 1,000,000 (100 times the actual amount on deposit). As it is evident that either large profits, or losses, can be incurred, a trading plan of action must be thought out in which the desired currency contract will be redeemed in a period that will realize a good profit.
When making a FOREX trading contract in US Dollars against the Euro, and the trading goal is the Dollar strengthening against the Euro, the profits made in the transaction will be in Euro. If the Dollar is trading against the Euro at a rate of US$1.342 to the Euro when the FOREX agreement is made, and at US$ 1.325 to the Euro when the contract is sold, then the difference made in Euros amounts to Euro 9,560.30 or US$ 12,667.37 based on a margin trading contract of US$ 1,000,000. Of course the bank's buying and selling 'spread' rates have to be taken into account in order to determine the actual profit realized in the transaction.
When trading currency futures, i.e. what a currency is estimated to be trading at a future date, the forward contract can be extended for a further period of time (for an additional charge) if the trading ratio is not favorable on the date that the forward contract comes due. This operation is known as "swapping the trade forward", and can be anywhere from a few days to a period of weeks or months.
When effecting trading contracts involving large sums of money a safety mechanism known as "stop-loss" is advisable in case the currency movements are going against the planned outcome of the contract. This procedure, in which an order is given to redeem the contract if it reaches a certain loss level, gives at lest partial protection against substantial financial losses.
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