Trading currencies and stocks have some similarities and differences.
I added this section to discuss this further and provide traders with basic information necessary to day trade the forex (foreign exchange) market. Today, the foreign exchange market, also known as “FX,” provides traders with some advantages absent from the stock market, so it is worthwhile for them to learn a bit more about the biggest financial market in the world (read more about currencies vs stocks here).
When someone visits a foreign country and pays for a product or service in his home currency, a currency exchange takes place – an exchange of the home currency for the foreign currency. This can happen if the tourist pays with a credit card issued by a bank in his home country (the bank converts the price of the product or service to the home currency based on an exchange rate, charges the tourist the corresponding amount in his home currency, and pays the merchant in the foreign currency).
It can also indirectly happen if the tourist first goes to a bank in the foreign country, exchanges an amount of his money to the foreign currency (based on the going exchange rate), and then pays the merchant in the foreign currency. Either way, a foreign exchange transaction takes place. The home currency is exchanged (sold) for a foreign currency (bought). If the tourist is American and he is visiting France, he will be exchanging dollars for euros. In the world of foreign exchange, it is said that he is selling dollars and buying euros at the same time. This is the same thing that happens when an investor trades currencies online, although the investor has access to better prices than the tourist.
Even though it is theoretically possible for the tourist to exchange dollars for euros in anticipation of a rise in the price of the euro relative to the dollar, the spreads (difference between the bid and ask price) that the banks charge would be too wide to be practical for short-term trading purposes. The online trader, on the other hand, would have at his disposition prices (exchange rates) with tight enough spreads for active trading. Until the late 1990s, currency transactions of this type were virtually available only between banks and huge customers (corporations and very large speculators like George Soros and others).
The forex cash or spot market, is an electronic over-the-counter (OTC) market where international banks post bids and offers for the world’s currencies. With the development of various trading platforms and advancements in internet technology, individual traders can now have access to the currency spot market.
- What is in a foreign currency price?
- Pips not Ticks!
- Margin requirements to trade currencies
- Making (or losing) money trading currencies
- Bid and Ask prices
- Types of orders to trade Forex
- Technical analysis in FX
- Fundamental analysis
- Advantages of Trading Currencies over Stocks
When you compare this section to the corresponding section for stocks, you will realize that the handling of orders is probably easier when you are trading currencies. This is because with currencies, you don’t have to worry about order routing (where to send your order) – nor do you have to even think about the different ECNs and other market systems where your order is to be sent (like you do with many direct access stock trading platforms). In my opinion, that is one advantage currency trading has over stocks and, as a result, you can focus more on actual trading and less on order routing or execution.