Currency Articles

Cheat Sheet / Updated 10-15-2021

Foreign exchange (or forex) markets are one of the fastest and most volatile financial markets to trade. Money can be made or lost in a matter of seconds; at the same time, currencies can display significant trends lasting several days, weeks, even years. Most importantly, forex markets are always moving, providing an accessible and target-rich trading environment.

Article / Updated 06-29-2021

When it comes to trading options, knowing how to look for breaks is key. For more details on a zoomed-out look at this, read How to Find a Breakout in Trading. One way to trade a breakout is after the break has occurred. You may not have noticed the significance of a particular technical level, or you may not have left orders in overnight to exploit a break. You turn on your computer the next morning to discover that prices have jumped higher overnight and feel like you’ve missed the boat. But you may still get a chance to trade the breakout if prices return to retest the breakout level. A retest refers to prices reversing direction after a break and returning to the breakout level to see if it will hold. In the case of a break to the upside, for example, after the initial wave of buying has run its course, prices may stall and trigger very short-term profit-taking selling. The tendency is for prices to return to the breakout level, which should now act as support and attract buying interest. You can use these retests to establish a position in the direction of the breakout, in this case getting long on the pullback. The figure shows where you could have bought on the retest of the break higher in AUD/USD. Credit: Source: eSignal Note that prices did not make it exactly back to the breakout level. When trying to get in on a retest, you may consider allowing for a margin of error in case the exact level is not retested. You could also consider using a strategy of averaging into a position to establish a position on any pullbacks following a breakout. Here the averaging range would be between current prices and the break level. You may get the chance to buy/sell a retest of a breakout level. The reason is that not every breakout sees prices return to retest the break level. Some retests may retrace only a portion of the breakout move, stopping short of retesting the exact break level, which is typically a good sign that the break is for real and will continue. Other breakouts never look back and just keep going. But to the extent that it’s a common-enough phenomenon, you still need to be aware of and anticipate that prices may return to the breakout level. From a technical perspective, if prices do retest the breakout level, and the level holds, it’s a strong sign that the breakout is valid, because market interest is entering there in the direction of the break.

Article / Updated 03-26-2016

In addition to the ebb and flow of liquidity and market interest during the global currency trading day, the following daily events tend to occur around the same times each day. When currency options expire Currency options are typically set to expire either at the Tokyo expiry (3 p.m. Tokyo time) or the New York expiry (10 a.m. ET). The New York option expiry is the more significant one, because it tends to capture both European and North American option market interest. When an option expires, the underlying option ceases to exist. Any hedging in the spot market that was done based on the option being alive suddenly needs to be unwound, which can trigger significant price changes in the hours leading up to and just after the option expiry time. Setting the rate at currency fixings There are several daily currency fixings in various financial centers, but the two most important are the 8:55 a.m. Tokyo time and the 4 p.m. London time fixings. A currency fixing is a set time each day when the prices of currencies for commercial transactions are set, or fixed. From a trading standpoint, these fixings may see a flurry of trading in a particular currency pair in the run-up (generally 15 to 30 minutes) to the fixing time that abruptly ends exactly at the fixing time. A sharp rally in a specific currency pair on fixing-related buying, for example, may suddenly come to an end at the fixing time and see the price quickly drop back to where it was before. Squaring up on the currency futures markets The Chicago Mercantile Exchange (CME), one of the larger futures markets in the world, offers currency futures through its International Monetary Market (IMM) subsidiary exchange. Daily currency futures trading closes each day on the IMM at 2 p.m. central time (CT), which is 3 p.m. ET. Many futures traders like to square up or close any open positions at the end of each trading session to limit their overnight exposure or for margin requirements.

Article / Updated 03-26-2016

Forex markets refer to trading currencies by pairs, with names that combine the two different currencies being traded against each other, or exchanged for one another. Additionally, forex markets have given most currency pairs nicknames or abbreviations, which reference the pair and not necessarily the individual currencies involved. The bulk of spot currency trading, about 75 percent by volume, takes place in the so-called major currencies. Trading in the major currencies is largely free from government regulation and takes place outside the authority of any national or international body. Trading in the currencies of smaller, less-developed economies, such as Thailand or Chile, is often referred to as emerging-market or exotic currency trading, and may involve currencies with local restrictions on convertibility or limited liquidity, both of which limit access and inhibit the development of an active market. Major currency pairs The major currency pairs all involve the U.S. dollar on one side of the deal. The designations of the major currencies are expressed using International Standardization Organization (ISO) codes for each currency. The following table lists the most frequently traded currency pairs, what they’re called in conventional terms, and what nicknames the market has given them. The Major U.S. Dollar Currency Pairs ISO Currency Pair Countries Long Name Nickname EUR/USD Eurozone*/United States Euro-dollar N/A USD/JPY United States/Japan Dollar-yen N/A GBP/USD United Kingdom/United States Sterling-dollar Sterling or Cable USD/CHF United States/Switzerland Dollar-Swiss Swissy USD/CAD United States/Canada Dollar-Canada Loonie AUD/USD Australia/United States Australian-dollar Aussie or Oz NZD/USD New Zealand/United States New Zealand-dollar Kiwi * The Eurozone is made up of all the countries in the European Union that have adopted the euro as their currency. Presently, the Eurozone countries are Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, and Spain. Currency names and nicknames can be confusing when you’re following the forex market or reading commentary and research. Be sure you understand whether the writer or analyst is referring to the individual currency or the currency pair. If a bank or a brokerage is putting out research suggesting that the Swiss franc will weaken in the future, the comment refers to the individual currency, in this case CHF, suggesting that USD/CHF will move higher (USD stronger/CHF weaker). If the comment suggests that Swissy is likely to weaken going forward, it’s referring to the currency pair and amounts to a forecast that USD/CHF will move lower (USD weaker/CHF stronger). Cross-currency pairs A cross-currency pair (cross or crosses for short) is any currency pair that does not include the U.S. dollar. Cross rates are derived from the respective USD pairs but are quoted independently and usually with a narrower spread than you could get by trading in the dollar pairs directly. (The spread refers to the difference between the bid and offer, or the price at which you can sell and buy. Spreads are applied in most financial markets.) The most actively traded crosses focus on the three major non-USD currencies (EUR, JPY, and GBP) and are referred to as euro crosses, yen crosses, and sterling crosses. The remaining currencies (CHF, AUD, CAD, and NZD) are also traded in cross pairs.

Article / Updated 03-26-2016

When you look at currency pairs, you may notice that the currencies are combined in a seemingly strange order. For instance, if sterling-yen (GBP/JPY) is a yen cross, why isn’t it referred to as “yen-sterling” and written “JPY/GBP”? The answer is that these quoting conventions evolved over the years to reflect traditionally strong currencies versus traditionally weak currencies, with the stronger currency coming first. According to the market quoting convention, the first currency in a pair is known as the base currency. The base currency is what you’re buying or selling when you buy or sell the pair. It’s also the notional, or face, amount of the trade. So if you buy 100,000 EUR/JPY, you’ve just bought 100,000 euros and sold the equivalent amount in Japanese yen. If you sell 100,000 GBP/CHF, you just sold 100,000 British pounds and bought the equivalent amount of Swiss francs. The second currency in the pair is called the counter currency, or the secondary currency. Most important for you as an FX trader, the counter currency is the denomination of the price fluctuations and, ultimately, what your profit and losses will be denominated in. If you buy GBP/JPY, it goes up, and you take a profit, your gains are not in pounds but in yen.

Article / Updated 03-26-2016

Online currency trading is offered by dozens of different retail trading brokerage firms operating from all over the world, so you have many options to choose from. Here are some key questions to ask when you’re choosing a broker: How good are trading executions? The key to evaluating any brokers is the speed and reliability of your trade executions. Are you consistently able to trade at the price you’re trying for? If you’re trying to sell, and your trade request fails, and you’re offered a lower price, you’re probably being requoted. (Requoting effectively means you’re trading on a wider spread than you bargained for.) Does your broker offer price improvement on limit orders? For stop-loss orders, the brokerage’s execution quality comes down to the amount of slippage experienced when prices gap following data or news announcements. You should expect some slippage on stop-loss order executions — the question is, “How much?” How are orders filled? Find out exactly how your stop-loss or take-profit orders are filled. Is a stop-loss sell order filled when the bid price matches the stop price, such as a selling stop at 10 triggered by a price quote of 10/13? Are stops guaranteed? If so, are there any exceptions to such guarantees? What’s the policy for filling limit orders? Does the market bid price need to match the price of the limit order to sell, for example? A reputable broker will have clearly defined order execution policies on their website. Are dealing spreads stable in all market conditions? Most forex brokers offer variable spreads these days. When market liquidity is high, the spreads will be tightest. During volatile market conditions and around major news events, spreads will naturally widen. However, the amount of variability can really differ among brokers, so make sure you understand how wide spreads can go when the market’s really moving. Look on a broker’s website to see if they publish their execution statistics, which can give you more insight into their execution quality — including speed, the percent of trade requests that are successfully executed, and the opportunity for price improvement. Remember: Tight spreads are only as good as the execution that goes along with them. What is the commission structure? Most online forex brokerages provide trade executions without charging trade commissions. Instead, the broker is compensated by the price spread between the bid and the offer. A few brokers offer a commission-based pricing structure coupled with narrower trading spreads. If the brokerage charges a per-trade commission, you need to factor that cost into your calculations to see if it’s really a better deal than a spread-based commission. How much leverage does the firm offer? Too much of a good thing? In the case of leverage, yes. Over the past several years, the maximum leverage available to retail traders has been reduced by regulators. For example, in the United States, the maximum available leverage is 50:1. In some markets outside the United States, such as the United Kingdom and Australia, 200:1 leverage is available. Generally speaking, firms offering excessively high leverage (higher than 200:1) are not looking out for the best interest of their customers and, more often than not, are not registered with a major regulatory body. What trading resources are available? Evaluate all the tools and resources offered by the firm. Is the trading platform intuitive and easy to use? What charting tools are available? What newsfeeds are available? Do they provide live market commentary on a regular basis? What type of research does the firm provide? Do they offer mobile trading? Are you able to receive rate alerts via e-mail, text message, or Twitter? Are there iPhone/iPad apps? Does the firm support automated trading? Does the platform offer robust reporting capabilities, including transaction detail, monthly statements, profit-and-loss (P&L) reports, and so on? Is 24-hour customer support available? Forex is a 24-hour market, so 24-hour support is a must. Can you access customer service firm by phone, e-mail, and chat? Are the firm’s representatives licensed? Knowledgeable? The quality of support can vary drastically from firm to firm, so be sure to experience it firsthand before opening an account. Is the firm regulated, with solid financials? In the United States, online currency brokerages are regulated by the National Futures Association (NFA), which is the self-regulatory body subject to Commodity Futures Trading Commission (CFTC) oversight. Other geographies with solid regulatory frameworks include the United Kingdom/Europe, Australia, Japan, Hong Kong, and Singapore — ideally you should trade with a broker that is regulated by at least one of these regulatory agencies. Who runs the firm? Management expertise is a key factor, because a trader’s end-user experience is dictated from the top and will be reflected in the firm’s dealing practices, execution quality, and so on. Review staff bios to evaluate the level of management and trading experience at the firm. If the brokerage doesn’t tell you who is running the show, it may be for a reason.

Article / Updated 03-26-2016

Identifying trading opportunities and planning each trade from start to finish is essential to success in currency trading. When you trade currency as an investment tool, remember to: Maintain trading discipline by formulating — and sticking to — a complete trading plan: position size, entry and exit (stop loss and take profit) before you enter a trade. Always trade with a stop-loss order. Decide on the stop loss before you’re in the trade and don’t move it unless it’s to protect profits. Identify trade entry and exit levels in advance through technical analysis. Understand how each currency pair’s prices move and what drives the prices. Determine position size based on the trade setup and your financial risk-management plan. Be patient — currencies move around a lot. Wait for the market to allow you to enter your trade strategy. After you’ve invested your time, energy, and risk capital in a trade, your work has only just begun. Managing your trade while it’s active is just as important to a successful outcome. Stay alert, be flexible, but stick to your trading plan.

Article / Updated 03-26-2016

Knowing the fundamental drivers of currency rates is the foundation of understanding price movements. This is very important to understand if you want to trade currency as an investment. Here are some suggestions: Get to know the major economic data reports from all the major economies. Understand the importance of expectations versus actual outcomes. Anticipate alternative outcomes to better gauge how the market is really reacting. Stay aware of the pricing in and pricing out of market expectations that occurs in advance of data and events. Factor incoming data and news into the major fundamental themes of interest-rate expectations, economic-growth prospects, inflation, and structural developments. Be aware that technical and position-related themes can overwhelm the fundamentals.

Article / Updated 03-26-2016

Three things make you a good currency trader: platform, methodology, and psychology. Often traders have the first two covered, but they come up short in the psychology department. Do you ever think that trading is too hard? That you can't seem to make money or make a good decision? If so, that's good! It means you're a perfectly normal trader who shares the doubts and fears of traders all over the world. The key is to develop a strategy to manage those doubts and fears so that they don't get in the way of your being a good trader. Trading is hard on people — it makes them confront their fears around money, self-worth, and performance. In life, you spend most of your time somewhere in the middle, neither succeeding wildly nor failing miserably, but managing to muddle through. With trading, that isn't the case — you either make money or you don't, and you know how you performed immediately. Here are some of the Achilles heels that can negatively impact a trader's performance: Impatience: Many traders enter or exit a trade too quickly. They don't stick to their plans, lose, and then blame themselves for days afterward. This blame game leads to self-doubt, which can make you hate trading. If you're impatient, the key is to find out what triggers your impatience. Is it around major trading events like U.S. labor market data, when the market gets volatile for a few minutes? If so, don't trade during that time. Does it tend to occur if you've just had a losing trade? If so, instead of placing the first trade that comes into your head, write it down and leave it for an hour; then read it over and see if you want to place the trade. (You probably won't, but if you do, at least you'll know it wasn't because you were impatient.) Fear: Fear is an important reaction, but sometimes it causes traders to freeze. If you're new to trading, just remember that currency trading gets easier the more you do it and the fear eventually subsides. Also, put things in perspective: No one will die as a result of your putting on one trade. If you use the correct money-management skills, and if you use a sell-stop order, then you should know how much money you may lose on any trade, which can limit the fear factor. Pride: You know that feeling in your chest — the one that feels like everyone is watching and judging you if you fail. If you're worried about what other people will think of your performance, good news: Most people are too obsessed with their own lives to worry about yours. Plus, it's natural to make mistakes, so give it your best shot and don't let your pride get in the way of your learning and growing as a trader. Greed: Did you let a trade run for too long because you thought you could wring another dollar from it? If so, you aren't alone. Greed clouds the senses. You shouldn't be trading, at least initially, to make a fortune. Have realistic expectations, and treat your early trades as an experiment. Try not to think of all the things you'll be able to buy with your earnings. Trading can make you a lot of money, if you're good at it, but it takes time. The best traders are passionate about trading — they're not in it for the money. Expectations: You can easily let your expectations snowball. But if you reach for the moon too soon, you'll be disappointed, and that can lead to more mistakes. You won't become Warren Buffet overnight, or in six months, or with a $6,000 account. If you use the correct money-management skills, you should risk only 2 percent to 5 percent of your account balance on each trade. Anything else could lead you to risk too much of your account, which could wipe you out if the trade doesn't go your way. Don't expect to win all the time. Most successful traders with solid money-management systems in place may only win a little over 50 percent of the time. Nurturing your psychological health is extremely important to your success as a trader.

Article / Updated 03-26-2016

You may think that the $5-trillion-a-day forex market may be too big to get caught up in the movements of other, smaller asset classes, but that's not the case. The forex market doesn't move in isolation — what other asset classes do can have big implications for currency prices. Here's how: Equity markets: If an equity market is rallying, check the domestic currency — sometimes it can follow suit. The Bank for International Settlements (BIS) believes that there is a link between forex and equities. In its view, forex trading can be driven by equity investors who go overseas to get better returns. Investors need to trade forex for two reasons: To buy foreign assets To hedge their returns Between June 2013 and May 2014, a puzzling thing happened: The Eurozone economy was underperforming many other global economies, but the euro was rallying. Instead of being driven by fundamentals, the single currency was moving in line with the Euro Stoxx equity index, which rallied nearly 10 percent over that period. Commodities: This is one of the most talked about correlations because the vast majority of commodities are priced in U.S. dollars. So, when the U.S. dollar rallies, the prices of commodities can fall because you need fewer dollars to buy your commodity. The reverse is also true if the dollar falls in value. If you see a sudden change in the dollar's value, take a look at what gold and oil prices are doing. The commodity/forex correlation doesn't not end there. Some commodity currencies can also move with commodity prices. For example, Canada is the world's sixth-largest oil producer, so if the price of oil is rising, this can be good news for Canada's economic fundamentals, which can also be good news for the Canadian dollar, and vice versa if the oil price is falling. Bond yields: An economy that offers higher returns on its bonds can be an attractive place to buy currency for obvious reasons. So, countries with higher bond yields can see their currencies rise relative to countries with lower bond yields. But beware: Sometimes high bond yields can spell disaster. For example, during the financial crisis in 2008, Iceland's two-year bond yields surged to 13 percent, but the government had to pay that much to attract funds because the economy was on its knees. It required a bailout, and the Icelandic krona fell more than 100 percent between 2007 and 2010. USD/JPY and the Nikkei: This is a popular cross-asset correlation, but it may not move as you expect. Because the yen is considered a safe haven, investors tend to buy it during periods of market distress. When the Nikkei is falling, the yen can rise, which weighs on USD/JPY. The opposite can also be true, so when the yen is falling (USD/JPY rising), the Nikkei can be on a march higher. Multiple factors can drive forex markets. Correlations with other markets are just one factor, but they can be very effective. When you trade forex, keep in mind that currencies don't trade in isolation.