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3 Major Differences Between Currency Trading and Equities Trading

12 January 2016 No Comment

canstockphoto8915854I published an article about the advantages and disadvantages of currency trading. If you read it and decided that currency trading is for you, the following article will be your starting point. Read on and learn why currency trading is different from equities trading. You will need that knowledge on your way to get insanely rich … or at least a little bit richer than now.

Instead of looking at single assets, as an FX trader you will look at currency pairs

Currency traders, or “FX-traders”, trade currency pairs. If a trader thinks the Euro will go up compared to the US Dollar, he will buy the pair EUR/USD at the current price of $1.09 (that means he buys Euros with US Dollars). When the price of the Euro goes up, he will sell the pair again, and he will get back more USD than he had before.

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No rocket since, it’s actually quite simple. You buy an asset that you think will gain in value and sell it afterwards at a higher price. What’s different though, is that you look at the relative value of two assets, not only at a single asset.

Looking at currency pairs, you will see something like this: USD/AUD = 1.44. That means 1 USD is equal to 1.44 AUD. In this case, USD is the “base currency” and AUD is the “quote currency.” If you buy the base currency, you will open a long position. If you instead sell the base currency, you will open a short position.

Trading currencies usually requires a much higher leverage than trading equities

The FX market is one of the largest markets in the world. However, currency movements are quite small. Most currency pairs don’t move more than 1 cent per day, which is less than 1%. Hence, it will take a long time to get rich if you invest 100USD.

That’s why many FX traders rely on the use of leverage. Basically, the trader will take out a loan provided by a broker, like for example Trade-24. Most brokers will provide leverage of 50:1 or 100:1. If you trade less than $50.000, you can even get a leverage of 200:1.

Now what does that mean? If you trade with a leverage of 100:1, you will only have to deposit $1,000 into your trading account, in order to trade $100,000 of currency. Hence, your trading volume is much higher than your actual funds, which enables you to make larger gains.

On the other hand, leverage increases your risk as well. If the currency pair moves into the opposite direction, your losses will be greater as if you don’t use any leverage. However, considering that currency prices usually don’t change more than 1% during intraday trading, the risk associated with high leverage is significantly lower compared to equities trading.

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Nevertheless, FX traders should not work without stop and limit orders. Moreover, it makes sense to get detailed information about your broker before opening an account. It’s also smart advice to use LinkedIn and connect with other traders before choosing a broker. Take a look at Trade 24 Linkedin, you will find a large community there. They can share their expertise with you and give you direct feedback on their experience with the broker.

While stock traders look at companies, currency traders analyze whole economies

Trading currencies is not very difficult, in fact, it’s quite straight forward. The challenge is to predict the right currency move. Therefore, FX traders need to understand what drives the value of a currency.

As with equities, FX traders perform technical analysis and fundamental analysis. While technical analysis of currencies is quite similar to technical stock analysis, fundamental analysis is very different.

On the contrary to equities investors, FX traders do not look at the performance of single companies, but on the performance of whole economies. Therefore, FX traders need to analyze macroeconomic indicators such as:

  • GDP growth
  • Retail sales
  • Industrial production
  • Consumer Price Index
  • Money supply
  • Interest rates
  • Geopolitical events

These numbers get published periodically by governmental agencies. That’s why every FX trader starts his/her day looking at the economic calendar, to make sure they don’t miss any relevant event. In most cases, markets will be more volatile before the release of a major report.

Currency trading is actually simple and you don’t need much technical skill. However, if you want to make money, you need to understand FX markets and currency valuations. Make sure you have these insights before you start trading, and you will have a good time.

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