Currency trading 101

My exploration of currency trading – 1

After viewing a rather horrible video predicting that the dollar might lose its place as the world’s reserve currency (with consequences dire — see the post A Perfect Storm), I decided to look into the Foreign Exchange (FOREX) market. I have now been studying it for about three weeks, and I have begun to climb the rather steep learning curve, which somewhat resembles Mount Everest. I am now ascending a boulder-strewn field, approaching the South Col. It is slow and rough going, but I have established a base camp at 22,000 feet, and am working toward the next one. My brain is unaccustomed to such heavy work, and I find I must rest frequently.

Here is my first report.

I began by ordering Foreign Exchange for Dummies, by Galant and Dolan, as a Kindle book, for $11.24. This presented a comprehensive introduction to currency trading, and I must have absorbed a full one per cent of the information therein, and felt confident enough to open a demo trading account with FXCM, receiving $50,000.00 in dummy dollars to play with. With several astute trades, I managed to build the account to $49,763.63, the balance as of this moment. The balance has been lower, and it has been higher. In doing so, I learned how to place long and short orders, stops, and limits, using FXCM’s trading interface and their Marketscope charts.

Since I wanted to advance beyond the Dummy level, which I thought I had successfully reached, I ordered two more books: one, a Kindle book for $.99 – the excellent Getting Started in Currency Trading, by Michael D. Archer. The other book was hardcopy, Beat the FOREX Dealer, by Augustin Silvani, and cost a lot more. Although I haven’t finished either one as yet, they both describe many difficulties a day trader faces. These are very revealing books.

This is what they told me: only about 10-20 per cent of traders make money – the rest lose. That’s because the broker is on the other end, and when the trader wins, the broker can lose, and vice versa. The broker makes his own deals with the central banks, collecting the transactions made by his clients. They also get a spread of several pips, a pip being .0001, or a hundredth of a cent, which is the unit of change. It doesn’t sound like much, but on a hundred thousand dollar transaction, it’s $10.00 per pip. In the transactions, the broker supplies the price feed and the trading platform, charts of market action, and various technical analysis values that many traders use as indicators of when trends are about to reverse or continue.

When you enter a trade, if the market is liquid, and most of the major currency pairs are, you buy, (say) Euros and are charged in dollars.  Buying establishes a long position.  The transaction is entered in a second or less.  You then wait and watch — for minutes, perhaps, or perhaps hours, before closing out your purchase.   You can also sell short: selling Euros you don’t have (the broker supplies them), then wait for the price of the pair to go down, then close your position with a buy for the same amount of Euros, repaying the loan from the broker and you keep the profit.  It the price goes up instead of down, you’re screwed. You aren’t allowed to hedge (setting up two offsetting trades on the same currency pair — i.e., both a long and a short position.)

Risky business — the market seems to act in a random fashion, and prices jump around a lot. Actually, there are patterns.  They are really hard to see.  Predictability also comes, if you can see it, from group psychology — buys tend to drive the price up, sells to bring it down, and people tend to do things, to an extent, in unison.  If a majority of people buy at the same time, an upward price trend may ensue.     There are many ins and outs of group behavior.

The broker supposedly takes his profit from the spread – when the trader buys, his price is several pips higher than he can immediately sell it back for; in a short trade, it works the other way. He starts out any trade in the hole. The broker has much more information than the trader, including how many traders in his clientele have placed long or short orders, where the stops and limits are, and the actual volume and dollar totals. Thus they have much better ability to predict when they should sell or buy. This information isn’t passed on to any but preferred, large volume customers.

Plus, the broker can cheat. They can manipulate the price feed.  For example they can introduce artificial spikes to trigger a lot of stop loss orders, and stops always cost their customers. They could also show false prices, shading them one way or another to fool the trader, although they couldn’t do this all the time because it would be obvious.  Since there is almost no regulation of the currency market, and no single controlling entity, it is alleged they often do. There is little recourse for the trader. It is caveat emptor on steroids.

Nonetheless, it may be possible to make positive money in the market, even though you tend to have more losing than winning trades.

As of now, Despite the temptation, I’m fairly convinced that I won’t be opening an actual account with my own precious real money, but the currency market is quite fascinating and very difficult to fully grasp. I plan to keep studying it for a time. There may be a later progress report, or perhaps a lame note quietly announcing I’ve given up. Or possibly, a notice of bankrupcy.

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3 Responses to Currency trading 101

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