Equity vs. FX market (What's Different?)

Even though I am new to forex trading, I have been speculating on equities for about a year. Going into forex trading I expected the trading style to remain consistent, but to my dismay I had to adjust to a totally new trading routine. Here are some of the major differences I’ve experienced:

• 24/7 Trading.
  
  While trading equity, I was limited to the market’s operating hours (9:30 AM to 4:00 PM Eastern Time.) I had great difficulty keeping up with my trading because at the time the market was open, I was at work. When I first began trading forex, I couldn’t comprehend how there is always a currency to trade, however, I quickly realized that I am no longer concerned with Eastern Time. Now I am trading in accordance to the time zones of the world, an accommodative option that enables one to trade at any of time of the day. Except for the weekend when banks are closed, you can trade the forex market 24 hours a day from Sunday afternoon to Friday afternoon Eastern Time. The three most popular markets are the European, U.S., and Asian markets. Here is diagram to illustrate what time these markets are open:
  
  
  Here is a visual of how these times work together to ensure 24/7 trading:
  
  
  Using this flexible trading schedule, there could be no excuse for lack of time! You can trade forex at any free moment you have, either during your lunch break at work, or even late at night when you can’t fall asleep!
  
  
• Trading on Margin.
  
  while trading equities I never chose to trade on margin, but I knew that the most leverage I could get is about 40%. This means that if I put in $5,000, the max total amount I can invest (while trading on margin) is $7,000. When I started trading on the FXCM Micro Trading Station, my notion of “trading on margin” was revolutionized. Margin trading is the rule rather than the exception in the forex market.
  
  The forex market is considered highly leveraged. Leverage means using a smaller amount of money to control a larger amount of money. When trading forex, trading on margin (a good faith deposit) increases leverage, and poses both advantages and risks.
  
  When buying stock, most investors put up the full price of the shares. Even those who trade stocks on margin typically put up at least 50% of the face value. On the other hand, when trading forex, one only has to make a good faith deposit, the MMR (Minimum Margin Requirement), which is a small percentage of the actual price of the trade (sometimes as low as 0.25%). Consider the MMR as a deposit paid for the transaction. Let me clarify this with an example: Suppose the current MMR for USD/CHF is $2.50. This means that for every lot (1,000 dollars in this example) that you purchase, you will set aside a deposit of $2.50 from your total equity. If you decide to purchase 25 lots, the total margin requirement would be $62.50. Without leverage, you would have to put up the full $25,000, but using leverage gives you the opportunity to invest in a few currency pairs at a time, or simply buy more of the same pair. Now that we have the basic overview of the way leverage can be used to trade forex, there is another very important concept that equity traders who wish to enter forex must understand, the way winning/losing works.
  
  
  
• When You Trade on Margin, You Can Lose More than What You Initially Invested!
  
  Now that you understand that MMR is merely a deposit made in order to get into a certain trade, how do you profit or lose trading forex? When the currency pair value moves in the direction in favor of your trade, you will notice that you are able to close the position at a profit. But, just as you can close the position at a profit, you might close it at a loss. The loss I’m talking about isn’t just losing the MMR, but possibly losing more.
  
  Since you are trading on margin, any losses that go below the MMR investment require making a payment when closing the position. This concept is totally different than equity trading without leverage, in which when you are simply a stockholder; you cannot lose more than you invested. Even if the stock’s value goes to zero, you simply lost whatever you initially invested, but this isn’t the case when trading forex with leverage.
  
  Consider the following example: Suppose you invest in 50 AUD/USD lots ($50,000), buying at $0.89296. You pay the MMR (suppose its 2.50/lot) ($125), and pray it will bullish. To your disappointment, the value of AUD/USD keeps decreasing. Now that you let your emotions play and did not sell in time at a low loss, the price reached a bottom of 0.88575, resulting in a total loss of -353.00. Even though you initially only invested the MMR (a total of $125), closing the position right now, will result in a loss beyond the MMR investment, a loss that will be debited from the balance of your account.
  
  


• No Commissions
  
  When trading equity, normally the trading websites charge a modest fee for every trade (Scottrade $7, Zecco $4.50), but trading with forex there are no commissions paid. NO COMISSIONS?? That sounds wonderful, but now you may wonder, how do the forex brokers make money? The answer is the spread. The spread is the difference between the bid (the price you can sell for) and ask (the price you can buy for), and is known as the bid-ask spread. In attempt to appear more attractive to potential investors, most brokers sites offer a very tight bid-ask spread. Even though some spreads may be very tight, the truth is that spreads cannot be avoided.

• Number of Currency Pairs
  
  How many different currencies can you think of? The Lev’s of Bulgaria, the Colons of Costa Rica, or the Birrs of Ethiopia and the list goes on. There are dozens different currencies in the world, creating numerous potential currency pairs. Unfortunately, most aren’t easily traded for speculation purposes. Now you may be puzzled and argue “why is it that I can buy any possible stock on the market, but I cannot buy any currency pair I can think of?” the answer to that question isn’t as simple. There are numerous reasons why certain currencies aren’t traded, some are political or economic, and some currencies are simply too risky/volatile to even consider.
  

  The most common currency pairs are formed from the eight most traded currencies illustrated in the chart on the right. The number of currency pairs offered for trade varies with the forex broker you may choose, but the popular pairs are typically offered by most forex brokers. The platform I personally use, FXCM Micro Trading Station allows for as many as 49 currency pairs. Keep in mind that the majority of the trading volume in the forex market (over 90%) is concentrated in the 4 most trade currency pairs: EUR/USD, USD/JPY, GBP/USD and USD/CHF. Since you don’t have to deal with thousands of stocks, you will be able to follow up on the big pairs and be able to better follow the forex market as a whole.

  
  

Welcome to my blog!

Hello everyone and welcome to my blog!

Before I get all technical, let me give you a brief introduction of who I am and what this blog is all about. My name is Asaf, and I am in my senior year of college studying finance in New York City. Recently I was given the opportunity to work as an intern for Forex Capital Markets, where I was first introduced to currency trading through learning to trade on the FXCM Micro Trading Station. As I was making my first clicks in my demo account, I realized how little I knew of the various features the station has to offer. While foraging the net and nagging my co-workers for answers I thought, why not share what I learn from my currency trading experiences with other beginners?

My interest in currency trading was sparked during my numerous travels, during which I personally experienced the fluctuations of currency pairs and couldn’t help but wonder what controls these variations. Only five months after my last visit to Europe in June 2008, I found myself exchanging Dollars for Euros at the Viennese airport, where I learned of some good news. Five months ago, a Euro cost roughly $1.70, but today, a Euro merely costs roughly $1.40. This made me wonder, what changed during the past six months that made our home currency stronger? Or is it the Euro that’s become weaker? And will I be able to become part of this world in which many of my friends and colleagues seem to be trading by simply buying/selling forex? These puzzling questions still resonate in my mind whenever I think of forex.

As I continued my search for answers, I felt as If I am learning a whole new language in order to understand what’s going on, and evidently, Barnes and Noble did not seem to carry a Forex-English dictionary. What does leverage mean? What about margin? What are those indicators everyone seems to be talking about? As I kept doing more and more research, I got more and more confused. Most online websites were targeted at those who have a financial background, or just simply try to sound smart. Each website introduced more terms which I didn’t know, and in the end I felt as if I was getting sucked into a whirlpool. Where is the site that explained everything in simple English so that I will actually be able to understand what this forex market is all about?

When I first created my account on BlogSpot, I began reading up on the numerous forex blogs that were on it. And again, to my disappointment, I noticed that 95% of the blogs have not been updated in the past 2-5 years (Not impressed with this futile internet research experience so far). Blasphemy! I thought. Building a community of loyal readers only to disappoint them with no additional blog entries past a certain point? That’s unethical. That is when I decided to start a blog. A blog in which I will share my experiences as a new trader and try to bring whatever I learn about forex in a new light, a light that will explain everything in simple English, so that anyone, and I mean ANYONE would be able to begin trading forex. A blog that will possibly end unsuccessful searches future traders may experience, and explain the forex jargon in a way that I would have wanted to learn: the simplest way.