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More than four trillion dollars moves through the currency markets in a single day, making it the most liquid market in the world. With margin rates as low as half a percent, you could control a $1,000,000 position in the Australian Dollar/US Dollar cross-rate with as little as $A5,000 in margin.
The biggest question though, is where to begin. If you want to buy shares in ANZ Bank, for example, you go to the ASX, place an order and once the transaction was complete, you would own ANZ shares.
Currency Trading is not much more complex, except that there are many different ways you can go about trading the price of a currency.
The major ways to trade currencies are in the SpotFX market, the Futures markets and the Options markets. You can also use Exchange Traded Funds (ETFs).
Let’s take a look at each of these markets:
- The Spot Foreign Exchange(FX) Market.
The SpotFX market is the most liquid market in the world, with trillions of dollars racing through here around the clock, Monday to Friday. Unlike stocks, which all trade through an exchange (the Australian Securities Exchange or the New York Stock Exchange), FX is handled between banks and financial institutions.
This does not mean you have to ring a whole bunch of financial institutions around the world to shop around for the best deal as an FX broker will collate the prices for you, as long as you have a brokerage account. One of the brokers I use for this kind of trading is optionsXpress (www.optionsxpress.com.au)
The FX Markets officially open at 9am New Zealand time (7am Sydney time) every Monday. Later in the day, the Asian banks commence trading (Sydney morning), followed by the European banks (Sydney afternoon) and finally the US banks (late Sydney evening/early morning).
When the US banks close, that is generally considered to be the end of the FX trading day. However, there is no real ‘close’ of the market because once the US finishes trading, the New Zealand banks are ready to go again.
This goes on all week until Saturday morning (Sydney time), which sees the final close of the US banks for the week. Since there is no ‘actual close’ during the week, ProfitSource uses ‘one hour after the close of the US stock market’ to ‘time stamp’ a close for the daily price bar as a point of reference. This is 7am (or 9am during Australian Daylight Savings Time). Swing traders would then look to place orders for the next day’s trading as soon as possible after the ‘close’ of the previous day.
FX is traded in lot sizes, generally of $10,000 or more, (though some brokers will allow smaller lots). Here is a general guide to what one position size is worth to you:
| Code |
Position Size |
Margin (1%) |
Tick Size |
Tick Value |
| FXADUS |
$A10,000 |
100 Australian Dollars |
0.0001 |
1 US Dollar |
| FXBPUS |
£10,000 |
100 Pounds |
0.0001 |
1 US Dollar |
| FXCDUS |
$C10,000 |
100 Canadian Dollars |
0.0001 |
1 US Dollar |
| FXEUUS |
€10,000 |
100 Euros |
0.0001 |
1 US Dollar |
| FXUSJY |
$US10,000 |
100 US Dollars |
0.01 |
100 Yen |
| FXUSSF |
$US10,000 |
100 US Dollars |
0.0001 |
1 Swiss Franc |
| FXADJY |
$A10,000 |
100 Australian Dollars |
0.01 |
100 Yen |
| FXEUBP |
€10,000 |
100 Euros |
0.0001 |
1 Pound |
| FXADNZ |
$A10,000 |
100 Australian Dollars |
0.0001 |
1 NZ Dollar |
Note: The codes above relate to ProfitSource software, using the following abbreviations:
AD = Aussie Dollar
BP = British Pound
CD = Canadian Dollar
EU = Euro (note the difference from the futures)
JY = Japanese Yen
SF = Swiss Franc
NZ = New Zealand Dollar
US = US Dollar
(For example, the Australian Dollar Japanese Yen cross rate would be FXADJY.)
The SpotFX Market is the most common vehicle for trading currencies and is very similar to trading Contracts for Difference (CFDs) on stocks except that profits and losses are denominated in a foreign currency, as per the table above.
I believe the SpotFX market is the best way to get started in currency trading.
- The Futures Market
The futures markets were initially set up for farmers to have more control over the prices of their goods. For example, Corn prices might be at all-time-highs but a farmer’s crop might not be ready for another three months. Using a futures contract, the farmer can sell his corn at today’s high price for delivery at a ‘future’ date, hence the name, ‘futures market’.
Nowadays, you can trade all sorts of futures, including Agricultural Commodities, Energies, Precious Metals and, of course, Currencies. Most Currency Futures are traded on the Chicago Mercantile Exchange (CME).
The Currency Futures prices will be very similar to the SpotFX prices, except for the interest rate component (or ‘cost of carry’), which I won’t go into here but which doesn’t make too large a difference for new traders.
Futures trade in larger lot sizes than the ‘minimum’ sizes listed for SpotFX above, typically beginning at $100,000 for Currency Futures. To view the ‘Contract Specifications’ for Currency Futures, visit the website of the Chicago Mercantile Exchange (CME), www.cme.com.
The major benefit of trading Currency Futures over the SpotFX market is that since the futures trading is all done through the one exchange, you have access to accurate and reliable volume data. If volume of sales is a large part of your trading analysis, you might prefer the Currency Futures markets over the SpotFX market.
For a more comprehensive study of futures, check out Appendix B of the Safety in the Market Smarter Starter Pack or book into a three-Day Interactive Trading Workshop.
- The Options Market
Some traders prefer to use Options to manage currencies. Options have a lot of positives and are a very flexible way to minimise risk, manage positions and lock in profits on trades. If you are interested in learning more about options, visit www.optionetics.com.au and book into a free class.
Options on currencies are generally traded in two ways: Options on Currency Futures and Options on Currency ETFs (see below).
The benefits of trading options on currencies are greater flexibility and better risk management, which are both very important when you are dealing in large sums.
The downsides to options trading are that you have to ‘learn the ropes’ and understand how options pricing works as well as understanding where the stock or currency that is the subject of the option is going. For example, you could be correct on the movement of a currency but if you trade the wrong options you could still lose money on the trade.
- Exchange Traded Funds (ETFs)
ETFs are stocks that trade on a stock exchange, like the New York Stock Exchange. Their sole purpose is to ‘mimic’ the price of a commodity, an index or a currency. For example, the stock code GLD:NYSE is designed to match the price of Gold.
There are currency ETFs that track the price of a currency, as listed below:
FXA = Australian Dollar/US Dollar
FXB = British Pound/US Dollar
FXC = Canadian Dollar/US Dollar
FXE = Euro/US Dollar
FXY = Japanese Yen/US Dollar
FXS = Swiss Franc/US Dollar
Trading an ETF is just like trading a stock, which may be more comfortable for brand new traders. However, it is important to keep in mind that currencies trade 24-hours in the SpotFX markets while an ETF only trades during stock market hours, meaning you won’t be able to close your position for about 16 hours out of every day. As a result, a quick look at any ETF charts shows a lot of ‘gapping’. This is where a market opens at a much higher or lower price than it closed the previous day and has to ‘catch up’ to the physical currency or commodity.
This has only been a very brief introduction to the world of currency trading, but hopefully it has tweaked your interest enough for you to investigate a little further.
I’d like to wish all our readers a very Merry Christmas, a Happy New Year and an abundance of good trades and good times in 2012.
Be Prepared!
Mathew Barnes
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