Currency Trading - Basics

The currency trade offers excellent opportunities for private and institutional traders and investors. The reason for this is that there are a large number of tradable pairs of currencies in the currency trade, which usually have sufficient volatility (price fluctuations). The currencies have sufficient liquidity and the transaction costs are low. In this article, I describe some important fundamentals for currency trading.

Currency Trading - Forex or Futures?

For traders and active investors, the question asks which instruments are to be used in the currency trade. It is recommended:

• Currency futures
• Forex trading
• Currency options
• CFDs on currencies
• Certificates in currencies
• Warrants on currencies

I am not a friend of derivative financial products that are not traded on a regulated exchange. That's why only exchange futures (foreign currency futures contracts) and foreign exchange options are possible for me. Both instruments are traded on regulated exchanges in the USA.

Certificates, warrants and CFDs on currencies have the major disadvantage that the pricing is not effected via a central exchange place. Rather, it is the chosen Forex broker or the bank who usually occupy the other side of the trades. Basically, one is acting against the broker or the bank, whereby the price is not transparent. In addition, there are relatively high transaction costs in the form of higher spreads. In very fast markets there is even the risk that no market is made by the broker or the bank at all and that you can not close your positions very slowly or very slowly.

Currency trading on the so-called Forex (Foreign Exchange) does not take place on a regulated exchange. There is no forex exchange. Trade is decentralized. The trader or investor is also acting here against his Forex broker. There are, therefore, the same disadvantages as in trading with CFDs, certificates and warrants. The only known and tried-and-tested exception is currency trading (Forex trading) through the interbank trading of Interactive Brokers. But even here, as a trader or investor, there is no way to let their interests be perceived through a neutral arbitration, if problems arise with orders. Another question is the security of deposited trading capital, the chosen Forex broker should go bankrupt.

This means that only the futures contracts traded on the CME (Chicago Mercantile Exchange) remain on the most important currency pairs, which also have acceptable sales:

• EUR / USD
• GBP / USD
• JPY / USD
• CHF / USD
• CAD / USD
• AUD / USD
• NZD / USD
• MXN / USD

Conclusion: The currency trade is interchangeable, because there are some advantages (about 50 tradable currency pairs, freely definable position size). The transaction costs and spread are low. The liquidity is always sufficient for the private trader in any case. If you have larger positions and you do not want to surrender to a Forex broker, you should trade the currency on the Forex Futures. The disadvantages are: Only eight tradable foreign currency contracts, no infinitely variable adjustment of the position size is possible.