Accessible Market
Foreign exchange (forex) is the most liquid of the
margin products, and London has the largest market
in the world, partly because it is well positioned
in the global time zones. Forex is a 24-hour market,
which means a dramatic move can take place when you
are in bed at night. You can protect yourself against
any adverse consequences by using a limit order, which
enables you to trade at a predetermined level. You
may also take out a stop loss.
As a speculator, you will buy or sell one currency
against another, and foreign exchange can be a way
to diversify your portfolio. You may also hedge. If
you bought a cottage in Italy for £100,000,
and are worried that the value in sterling may fall
after a couple of years, you can use the currency
market to hedge against euro depreciation. International
companies may hedge to protect against the differential
between the currency in which they report earnings
and that in which they pay dividends.
If you trade forex directly, the bid-offer spread
is very tight and, as a private investor, you can
trade on the same terms as institutions, which was
not the case a few years ago.
Most of your trading will probably be in the three
largest markets: euro/ dollar, dollar/yen and sterling/dollar,
also known as the cable rate. At the time of preparing
this edition of the book, some forex speculators have
made significant money on the weakening dollar.
Unlike shares, currencies are not linked to underlying
value. They do not reflect, for instance, director
sales or profit warnings. But they can swing as a
result of unexpected interest rate figures.
When you trade in forex, as in derivatives, you make
money only from volatility. It tends to be high even
on quiet days, and traders have found it profitable
to go with the flow. David Jones, chief market analyst
at CMC Markets, has described forex as a market that
‘plays by the rules of technical analysis’.
You may follow major currency values in one column
in your newspaper. The arrival of the euro has made
the market smaller and so made your job easier.
Trading Outlets
In forex, you may trade either physical money, or
derivatives. Let us look at each.
Forex brokers will trade directly for you, but may
require evidence that you have some trading experience.
As with derivatives, you will pay initial margin,
in the form of upfront cash, which you need to top
up where needed, failing which the broker will close
your open position at a loss. Your position in forex
is commonly leveraged by up to several hundred times,
which is much more than in derivatives.
To reduce pricing unpredictability, find a broker
that will trade at the price on the screen, known
as the dealable rate. You may have to pay a commission,
percentage based or fixed, on trading. Look for a
good value package.
Your easiest way to gain access to foreign exchange
derivatives is through spread betting or CFDs, where
the spreads can be as competitive as those available
to institutions spot trading forex directly. Forex
options are over the counter and mainly for institutions.
The futures market is on-exchange is for experienced
investors.
Training
Some dealers, including GNI Touch (www.gnitouch.com)
and CMC Markets (www.cmcmarkets.co.uk), offer free
training sessions. Many firms offer facili¬ties
for placing mock trades.
|
