Day Trading in the Currency Markets
Currency trading can be really exciting for the day trader. Every day, trillions (yes, trillions with a ton) of dollars in currency are exchanged between governments, banks, travelers, businesses, and speculators. With every trade and every point in the exchange rates, you have new opportunities to make money.
Currency is a larger and more liquid market than the US stock and bond markets combined. It is often referred to as the forex market, short for foreign exchange. Forex can be an attractive place to store some of your trading money, and it can be a great resource for day trading.
Here’s another cool thing about the currency market: some types of currency trading are tax-free. These are usually long-term trades, involving the currency itself, and neither day trades nor trades in the futures or futures market. But still – tax free! In other words, don’t be fooled by ads for forex brokers that promise tax-free income until you read the line.
How are currencies traded?
The exchange rate is the price of money. It tells you how many dollars it takes to buy the yen, the pound, or the euro. The price people are willing to pay for a currency depends on the perceived investment, job and safety opportunities in each country.
If US companies see big opportunities in Thailand, for example, they will have to trade their dollars for baht in order to pay rent, buy supplies and hire workers there. This situation leads to an increase in the demand for the baht against the dollar and leads to an increase in the price of the baht against the dollar.
Exchange rates are determined on the basis of supply and demand, just like bonds and stocks. The quote might look like this:
US dollar against Japanese yen = 81.3150 81.5250
This is the exchange rate for converting US dollars to Japanese yen. The bid price of 81.3150 is the amount of yen that the trader gives you to sell dollars and buy yen. Ask price 81.5250 is the amount of yen that the trader will ask you to buy dollars and sell yen. The difference is the merchant’s profit, and of course, you will also be charged a commission.
Note that with currency, you are both a buyer and a seller, which can increase your chances of winning, but it may also increase your risk.
Day traders can trade currencies directly at the current exchange rates, which is known as spot trading. When you exchange money to go on vacation in a foreign land, you are making the exchange on the spot, and you are allowed to do so as a merchant or as an investor. Day traders can also use exchange-traded funds or currency futures to take advantage of the changing prices of cash.
Where are currencies traded?
Spot currency – the real value of money – is not traded on a regulated exchange. Instead, banks, brokerages, hedge funds, and currency traders buy and sell among themselves all day, every day.
Day traders can open dedicated forex accounts through brokers or currency dealers and then trade as they see opportunities during the day.
If you are interested in currency trading, be sure to check out the fees involved. Some banks and brokerages are already set up to do corporate and traveler forex trading, so the fees will be too high for you to make a decent profit.