FX is the biggest most liquid market on the planet
Do you find yourself wanting to trade after 4pm when the local share market has finished for the day?
Well, the foreign exchange market or FX market could be just the answer.
Open 24 hours a day from first thing Monday morning until early Saturday morning, FX is the biggest most liquid market on the planet with a daily turnover of $4 trillion, endless opportunity and suitable to a wide range of trading styles.
A market that’s ready when you are
Trading begins early Monday morning New Zealand time and moves across the globe. Being a market that trades around the clock allows you to react to news when it happens and trade whatever time of day suits you.
If you live in WA for example, trading FX allows you to trade when the UK market is open and FX volumes are at their highest. If your lifestyle dictates that you don’t get time to log on until after dinner and the kids are in bed, no problem - the FX market will be ready.
Everything impacts on FX rates
In the FX market traders can respond to breaking news immediately. Interest rate announcements, employment figures, GDP numbers are a big deal and move currency rates. Rising and falling equity markets also directly flow on, as do political events and major corporate news.
The list goes on. And with FX rates prone to move 1% in a trading session, plenty of money can be made (lost) when you consider most FX trading is leveraged.
And on the topic of leverage it’s wise to limit your positions to the potential drawdown a currency pair can extract from your account. Never mind the potential profits you stand to make, they’ll take care of themselves.
Take your pick
FX investors and traders have access to a wide range of currency pairs through Margin FX or CFD platforms. That means you can even trade lesser known currency pairs from places like Eastern Europe and Scandinavia if you have an idea what is going on in these countries. More likely however you’ll concentrate on the AUD/USD or Aussie cross rates (AUD/JPY, AUD/GBP, AUD/NZD).
Minimum parcels vary but USD $10,000 is typical. Trading is commission free however you do pay the spread or the difference between buying and selling rates which is where the Margin FX or CFD provider makes its money.
If the quoted rate is AUD/USD 0.9140/0.9142 you pay the higher price 0.9142 when buying and receive the lower price 0.9140 when selling. This 2 point or 2 pip difference is your cost. On a USD $10,000 lot the spread costs $USD 2.
Regarded as the best trending market
FX rates can be volatile short term, however over the longer term – 6 months or more they tend to be remarkably stable.
Currency rates after all reflect the collective strength (weakness) of an entire economy, or region in the case of the Euro. This leads to currency trending more reliably than other financial markets.
Take the USD weakness over the last decade. Against a whole basket of currencies the USD has lost value as its indebtedness to the rest of the world has grown.
In Jan 2000 the EUR/USD was trading at a rate of EUR/USD 1.0. Today the rate is approximately EUR/USD 1.37 or 37% stronger.
Our dollar has moved by a similar amount. Back in Jan 2000 the AUD/USD was around 0.6500. Today we’re at AUD/USD 0.9140 a rise of 40%.
What’s ahead for the rest of the year?
Given long term trends don’t reverse quickly, probably more of the same. With the boom in natural resources showing no signs of stopping it seems inevitable that we will see the AUD/USD get to parity or 1.00/1.00.
Locally the major banks are forecasting parity by the end of the year or early next. And what about the Euro?
At the moment it’s on the way down thanks to Greek debt woes and similar problems with Portugal and Spain. Its value against the US dollar looks like a case of choosing between the best of a bad bunch with Europe the loser at the moment.
Neither economy is in great shape and for my money I’d prefer an easier bet. Expect the EUR/USD pair to be about where it is today by year’s end.
Stephen Hogan is with the Finance News Network in Sydney.
