Buying Stocks 101

One of the most significant concepts to understand when trading currencies is that, unlike other markets such as buying stocks, a currency trade consists of both a buy and a sell simultaneously.  For example, when you expect the Dollar to go higher against the Euro, you are dealing with two currencies and an exchange has to be made between them.  In this example, when you buy the Euro, you are selling the Dollar.  This makes the foreign exchange market a unique and exciting avenue for savvy traders.  In order to learn currency trading, you need to understand the terms.

Going Long, Getting Short, and Squaring Up

As in most financial markets, certain terms are used to indicate market positioning.  A long position refers to having bought a currency pair.  A short position means you have sold a currency pair, meaning you’ve sold the base currency and bought the counter-currency.  When you long, you expect prices to rise.  When short, you expect the inverse.   When neither long or short, you are referred to as being square or flat.  If you have an open position and you intend to close it, that is called squaring up.

Rollovers

Because you are trading currency, that currency will draw interest, or accrue interest in the case of a short position. Thus, if you carry over an open position from one value date to another, you are rolling over your position and will be affected by the interest rate differential, the difference between the interest rates of the two currencies you are trading.  Rollover periods vary depending on holidays or weekends, but generally you are looking at a one-to-two day rollover.  If your just beginning to learn currency trading, it would be helpful for you to stop here and make sure you understand value dates and rollovers before moving on.

Trading in the Currency Market

There are two primary ways of executing a trade in the currency market: live trades and orders.  A live trade is executed immediately, often with the click of a mouse.  This can be a bit risky if you enter the wrong amount because there is no turning back once a trade is submitted, however the up side is that you can react to moves in the market as they occur and potentially profit from those fluctuations.  On the other side, you have orders, meaning you are requesting a broker take an action at which time the market meets your conditions.  A take-profit order requests that your position be closed at a specified level, essentially locking in your gains.  Limit orders simply trigger a trade at more favorable levels that currently exist in the market.  Stop-Loss orders do essentially that, stop you from losing your shirt by closing out a failing position.  A Trailing stop-loss order is a stop-loss order that you set a fixed number of pips from your entry rate, allowing you to neutralize losing positions quickly, but let a positive position carry on.  One-Cancels-The-Other orders is a stop-loss order paired with a take profit order.  When one triggers, the other cancels, offering a great risk-management tool when trading currency.  Lastly, contingent orders are simply a combination of several order types strategically formed to cover all your goals and manage your risks.

Where to go from here

If you truly wish to learn currency trading, your best bet is to locate a Forex broker and begin to read over their policies and training documents.  Trading currencies is not like buying stocks; it is much more dynamic and returns can be realized quickly.  But be sure that trading currency is speculating at its core, so be careful to step in the waters slowly and gain experience in the market before risking large sums.