Currencies are traded in the foreign exchange market (forex) 24 hours a day, 7 days a week. Forex, is the largest and the most liquid financial market in the world and the very size of the market tends to reduce the possibility of market manipulation by a select group of people. Hence, the foreign exchange market is loosely regulated by the Commodity Futures Trading Commission (CFTC). Currency pairs are not traded in a centralized exchange but are traded between agreeable buyers and sellers in the over-the-counter market (OTC).

Currency Trading Tips

Using Leverage Wisely: Use of leverage is encouraged in the foreign exchange market since fluctuations in the price of a currency pair are typically fractions of a cent. The maximum leverage that can be employed by a trader is calculated using the following formula:

Maximum Leverage (Margin-Based Leverage) = Value of Transaction / Margin Requirement

For instance, if a person wants to control $100,000 worth of trade, he/she can borrow the sum from the broker by depositing a small initial margin. Say, the margin requirement is 2 percent of the total transaction value, the trader is expected to deposit $2000. Thus, the trader’s margin based leverage is 50:1. Using excessive leverage, especially when one is unsure about the direction of the market, can land one in deep trouble. Trading on margin is only advisable for people who have the capability of interpreting forex signals or have reliable automatic forex trading robots. For more on forex signals one may refer to the article, ‘Accurate Forex Signals: How to Find Profitable Forex Signals’

Placing Stop and Limit Orders: Placing stop orders is useful from the perspective of limiting losses and taking advantage of the potential upside breakout. Placing a limit order allows people to enter a new position or to exit a current position at the specified or better price. A limit order may never be executed because the market price may quickly surpass the limit before the order can be executed. The term better is relative to the nature of the limit order that is placed. A trader, who would like to sell a currency pair, places a limit sell order at a price above the current market price to book profits; while a trader, who would like to buy, sets a limit price below the current price. In the first case, the sell-stop order should be placed below the current market price to attempt to cap the loss on the position while in the second case a buy-stop order should be placed at a level above the current price. These are useful currency trading strategies.

Using Fundamental and Technical Analysis: Fundamental and Technical analysis are different, although both are necessary from the perspective of gauging currency movements. The former tries to determine fluctuations in the price of the currency by assessing factors that have a direct bearing on the value of the currency; while the latter relies on charts and graphs to effectively compare past trends and repetitive patterns to predict fluctuations in value. The charts, that are used in technical analysis, are Line Charts, Bar Charts and Candlestick Charts.

Line charts connect the opening and the closing price with a line while bar charts use vertical bars to indicate the range of the currency for a given time period. Candlestick charts give the opening price, the closing price, the highest price and the lowest price with the help of a vertical bar. If the closing price is less than the opening price, the vertical bar is colored.