CurrencyTradingABC.com

As currency trading becomes more popular, so too does currency options trading.  Options on currencies work in many ways like equity options or options on futures.  If a trader believes that a currency’s price will rise, he/she buys a call on the currency.  This gives them the right to call(buy) the currency away at a set price for a specified period of time.  On the other hand if he/she believes that a currency’s price will decline soon they can purchase a put.  This allows the trader to put(sell) the currency at a specific price for a specified period of time.  It should be noted that these are rights and not obligations.

Currencies trade in pairs.  The base currency(first one in the pair) is the one that has the call or put being purchased on it.  One type of option contract is the traditional option.  Unlike equity options the trader can select the strike price and expiration date.  The broker will then decide on the premium they will charge to enter into the contract.  If the trader feels the premium is acceptable, he/she decides on the number of contracts and enters the order with the broker.If the trader believes that the price of the pound will rise against the dollar they will buy calls on the GBP/USD.  If this actually happens before the option expiration date, the trader will exercise the option and purchase the pound.  He/she will then be able to turn around and sell the pound at the then higher price, making a profit.  If this scenario does happen the option is said to be “in the money.”  If the pound actually drops against the dollar, the option will expire worthless.  The only loss to the trader will be the premium paid for the right.  The risk on this type of transaction is really quite a bit lower than it is on outright trading of the currency itself.  Trading currencies does not limit the traders exposure to losses like options do.  This is a major advantage to trading them.

Another type of currency option is the SPOT contract.  This option more closely resembles equity options.  It does not have to be exercised in order to realize a profit.  SPOT stands for single premium option trade.  If you think a currency price will rise from current levels you select the strike price(exercise price), select the expiration date and purchase the contracts you want.  If you are correct and the price moves higher before the expiration date, the profit is simply credited to your trading account.  Premiums on SPOT contracts are usually higher than those on traditional options.

Premiums on options are determined using a number of factors.  The most common factors are the time between now and the expiration date.  The longer the time period the higher the premium.  The closer the strike price is to the current market price the higher the premium will be.  The volatility of the currency price will also typically affect the premium level.

The are several reasons traders participate in currency options trading.  For the speculator the reason is purely for profits.  Due to the limited risk, it can be a much easier way to profit from moves up and down in a very accessible market.  Trading in currency options can be done 24 hours a day, 5 days a week just like the underlying currency.

Currency options trading is a strategy used by many who are attempting to hedge actual positions they are currently holding in the currency.  If they are long the currency, they may buy puts to hedge themselves from a decline in price.  If they need to make payments using the currency in the near future, they can buy calls to protect themselves from a rise in prices.

Thus far we have discussed buying calls and puts.  This is the most common way to trade options.  There are those you sell options on currencies though.  If you feel that a currency price will remain steady or within a small range for a period of time, you may sell puts or calls.  If the price remains steady the option will expire and you can keep the premium.  Due to the higher level of risk the trader is exposed to with this style of trading, larger amounts of money are required to be on deposit.

Currency options trading can be extremely profitable if done correctly.  The lower cost of participating makes it easier for more people to get involved.  The limited amount of capital at risk is also very appealing.

This currency trading tutorial is intended to give a basic understanding of the FOREX market.  The topics that you need to understand before you start trading are introduced.  Before you are ready to begin trading you must obtain a thorough understanding of these topics.

When you open an account with your broker, you will only be required to deposit a small amount of the trading capital you will be using.  Your broker will lend you the largest part of your trading capital.  This use of leverage will increase the level of exposure you have in the market.  This can multiply your gains as well as your losses.  It is important to pay close attention to this and use stop-loss-orders to help limit your risk.

Currencies trade in pairs.  Some of the most common pairs are the EUR/USD(euro/dollar), USD/JPY(dollar/Japanese yen), GBP/USD(British pound/dollar) and the USD/CHF(dollar/Swiss franc).

The base currency is the first one listed in the pair.  This is the currency that will be purchased. It will be purchased with the quote currency, the second one listed.  For example if the EUR/USD is quoted at 1.37, it means that you can buy one euro for $1.37.  If a pair is listed 1.54 GBP/USD it means that each British pound will cost $1.54.

The currencies have a bid and an asking price.  The price you pay for the currency is the asking price. The price at which you can sell your currency is the bid.  You may be able to buy EUR/USD for $1.37.  If you turn around and try to sell the same contract you may only receive $1.34.  The difference between the two prices is the spread, or brokers commission.

In order to make a profit from trading it is obviously necessary to decide accurately which way currency prices on the base currency will move in relation to the quote currency.  If you believe the euro will move higher in relationship to the dollar you would purchase the euro at the current exchange rate with the dollar.  An example is 1.41EUR/USD.  You will buy the euro at $1.41 because you think the euro will move up and you can sell it at $1.60 in the near term.  If however you think the euro is too high against the dollar, you would sell the euro. An example is 1.61 EUR/USD.  You would sell the euro at $1.61 with the intention of buying it back at maybe $1.41 in the future to close the position.

Another currency trading tutorial may suggest that you use either technical analysis or fundamental analysis to make your trading decisions.  This tutorial suggests that you are better off being familiar with both.  You may decide to put more weight on one or the other but having a good feel for both will improve your trading results.  By understanding the fundamental issues in the market that cause prices to move up and down you will be better able to predict future price changes.  By having a high degree of knowledge on how to use technical analysis, you can use stop-loss orders to help you limit your exposure to trading risks.  You will be able to identify price trends easier as well.  If you can use technical analysis along with the fundamental analysis your chances of success will be increased by a large margin.

While this currency trading tutorial has introduced you to this exciting market, you now need to gain a higher level of understanding of the topics discussed here.  This is a complex and competitive market.  Do your homework.

One of the fastest growing segments in the market is 4x currency trading. The 4x is a unique market because of its trading volume and liquidity.  It is estimated that close to $4 trillion worth of currencies are traded daily.  4x currency trading is a high risk venture.  This partly because it involves the use of leverage.  Only a small deposit is required to
start.  Most of the funds are borrowed from the financial institution holding the account.  This can lead to multipied profits as well as loses depending on the trade outcome.

The objective of the trader is to buy low and sell high just as it is in other markets.  Profits are made on the spread between the two prices. However, if prices are expected to fall on the currency the trader can easily sell the currency with the intention of buying it back when the price drops, to cover the position.  The profit is the spread between the
amount it was sold for and the price at which it was later purchased. Currencies trade in pairs.  The most common pairs are the USD/EUR(the dollar and the euro), USD/JPY(the dollar and the Japanese yen), GBP/USD(the British pound
and the dollar) and USD/CHF(the dollar and the Swiss franc).  Over 80% of all transactions involve the dollar.  The first currency in the pair is called the base currency.  This is the one that will be bought or sold.  It will be bought or sold using the second currency called the quote.

There are many participants in the the 4x currency trading market.  Those in the top level of the market are those who trade the highest volume.  These traders are the largest investment banking firms in the world.  They are known as the inter-bank market.  They typically have the advantage of access to the best prices in the market.  All prices for the same currency are not the same.  They will typically  vary by only a small amount though.  The inter-bank circle trade for their customers but the majority of their activity is in trading for themselves.  They make up more than 50% of the trading activity in the market.

Central banks like the Federal Reserve also participate in the 4x currency trading markets.  They use the market to try to control inflation, interest rates and money supply in their own countries in an attempt to maintain stability. Hedge funds are a rapidly growing segment of the market.  These are funds with a wider spectrum a trading guidelines than mutual funds.  They can buy and sell short and engage in a riskier style of trading than other funds.  It is projected that over 70% of the trades in this market are made for speculative purposes.

Many things may affect price movements of a specific currency.  A country’s economic policies can not only affect their currency prices but also those of their trading partners.  Budget surpluses and deficits will affect prices. A nation’s productivity and employment level will cause changes in currency prices.  Inflation and inflation expections will move prices.

The overall environment of the market place is challenging.  Trading can be done 24 hours a day somewhere in the world.  With the large amounts of money traded daily traders need nerves of steel.

In the final analysis, 4x currency trading is a complex and competitive undertaking.  In order to profit in this market you must be well educated and agile.