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.

When a trader buys and sells currencies within the same day it’s known as currency  daytrading. This means that all trades are done within the same day and nothing is held for over 24 hours by the investor. Anyone can do currency daytrading whereas previously this kind of forex activity was only available to large banks and financial institutions

Who Does Currency Day Trading?

This kind of daytrading is attractive to individual traders at home as forex uses leverage to allow a small investment to reap potentially very large rewards (while also running the risk of large losses as well). Professional day traders can work from home or they can work for larger institutions like investment banks, the difference being the amount of research and resources available to them.

Successful currency day trading means having usually invested a lot of your own time in concentrating on one or two specific currency pairs which you will eventually become an expert on. Making money in this kind of business is largely based upon experience as one must be able to time the correct entry and exit positions from the trade perfectly.

How Does One Day Trade?

Currency day trading is based upon a set of analytics that dictate when the trader will enter the market to buy or sell currency with a view to making a profit. A lot of research time and money goes into developing a currency day trading system which will spit out signals. These are based upon either the fundamentals method which uses up-to-date news from around the world or the technical analysis method which is based upon charts.

Is There A Guaranteed Method?

A recent phenomenon in the market has been the development of currency day trading systems which are completely on autopilot. This means someone has taken the time to teach software what signals to look for and when to trade based upon them. Many think that this is a successful method as the computer faces none of the human weaknesses such as the psychological needs to ride a profit or trying to trade out of a loss.

However there is unlikely to ever be a currency day trading system which consistently makes a lot of money and no losses as the owner of would be very unlikely to want to sell or share his system.

As with all trading you should make yourself aware of the risk factors involved with currency day trading. If you’re starting out you will incur losses which you will have to accept as part of the learning process and be prepared to accept the fact that there is no substitute for learning how to trade yourself and not relying entirely on any one system.