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.