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30 Currencies Including the G7, USD, CAD, EURO, GBP, JPY, RB

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6he Pri"te Currenc* E1ch"nge +"n c!nsistent tr"c rec!rd !- unc!()r!(ising ethics instillsc!n-idence "nd trust% 5e use cutting edge techn!l!gies t! ensure u) t! the (inute in-!r("ti!n -r!(the -in"nci"l #!rld% 6his "ll!#s us t! res)!nd $uicl*, "nd gie *!u the results *!u "nd *!ur )rinci)"l+u*er' desire%

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See also: The MoneyWeek guide to Forex jargonand Paul odrigue!"s full

re#o$$endations in What are the %est %ets in Forex no&'!

+urrency tradingis undeniably riskier and faster moving than other markets. "s financialwriter ugo ixon says, some view it as the ultimate example of casino capitalism inaction/. 0ut there are plenty of advantages to knowing how the F market works. For astart, you can protect yourself against adverse currency movements 1 useful if yourportfolio has exposure to overseas investments. "nd unlike parts of the e*uity and bondmarkets, trading is *uick, costs are low, and li*uidity (the ability to buy and sell whenyou want! is deep. #t)s also becoming more accessible to retail investors. The number of

23 brokers offering F dealing to private investors doubled last year and the rise ofspread betting has made it easy to get involved. $o if you)re tempted to dabble in theworld)s largest market, what do you need to know4

The basics of the forex market

A foreign exchange dealis 5ust two people swapping a fixed amount of one currency foranother at an agreed price, the exchange rate. This can take place at today)s rate (known

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as dealing 6spot)! or at a rate negotiated today, with the two currencies being exchangedat a future date (known as dealing 6forward)!. The latter is often used by firms looking toprotect against currency movements before paying an overseas supplier or receiving cashfrom a foreign customer.

7ne key point to remember is that, unlike shares, bonds or commodities, the value of onecurrency is directly linked to the price of all the others. "s the FT puts it, the currencymarket is relative rather than absolute/. #n a stockmarket bubble, shares can all risetogether and everyone makes money8 but if the dollar rises, it does so at the expense ofanother, weaker currency. 9very winning up bet is matched by an e*ual losing down betand vice versa8 F is a true :ero-sum game.

What determines exchange rates?

"s with anything else, the value of a currency is largely down to supply and demand.;ore buyers than sellers for sterling will push up the exchange rate and vice versa. The

tricky bit is deciding what)s actually causing people to buy and sell in the first place.

+urrency marketsare underpinned by the principle that money flows to where it can earnthe highest return for the least risk. #f a country)s assets, such as shares and bonds, offerhigh rates of return for low risk, then people will demand that currency in order to investthere (most 2$ bonds have to be bought with 2$ dollars, 23 gilts with sterling and soon!. 7verall, a currency can be viewed as a bellwether for the economy)s health. "s arule, a growing economy with stable prices and a wide range of competitive goods andservices (such as the 23! will see more demand than one in political turmoil, with highinflation and few exports (such as ? buys a lot of

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#f that all sounds a bit daunting, the good news, as trader Tom Tragett points out, is thatonce a forex trend is established it tends to last, as the fundamental drivers behind it canlast months, or even years.

How to trade currencies

Trading the currencies themselves in spot dealsis the first option. This won)t suit mostsmall investors because of the relatively large minimum deal si:es (>AB,BBB is common!,but it)s a good way to demonstrate how trades work.

%et)s say your broker *uotes a minimum deal si:e of >CB,BBB and an initial margin rate ofAD. The initial deposit paid is B.BA x >CB,BBB, or >E,BBB. You think the pound willstrengthen against the dollar. Your broker *uotes a 0@G2$ spread of '.B?BBG'.B?BA.You buy at '.B?BA. You are later proved correct when the rate rises and your broker*uotes a new 0@G2$ spread of '.B?BG'.B?A.

#f you now close the position by selling at '.B?B, the profit is B.BBCA, or CA 6ticks)('.B?B 1 '.B?BA!. Hith a deal si:e of >CB,BBB, this is a profit of B.BBCA x >CB,BBB or>EIB. That)s a ?ED profit on the initial margin of >E,BBB. 7f course, the rate could 5ust aseasily have moved against you 1 and it)s vital to remember that when you trade onmargin, relatively small exchange-rate movements can result in big profits or losses. Jotonly that, but your losses are unlimited 1 if the rate moves far enough against you, youcan lose far more than your initial deposit. The usual solution is to agree a stop loss withyour broker, the best being the 6guaranteed stop). There will be a charge for this, but itensures that your losses are always capped.

Spread betting$pread betting works in almost exactly the same way, with one key difference 1 youdon)t need vast sums of money to get started. "nother great feature of spread betting isthat your gains are tax-free.The principle of spread betting is the same whether the bet concerns cricket scores orcurrency markets. The amount you win or lose depends on how many 6points) you areaway from the spread-betting firm)s initial prediction (or 6spread)!. Hhen betting on aforex market, one point is e*ual to one pip, or tick (a B.BBB? movement in a currencyrate!. @rofits or losses are settled at a fixed amount of, say, ABp or >? per point,depending on the spread-betting firm and si:e of the bet.

The three largest markets, according to ;oney";, are euroGdollar, dollarGyen, andsterlingGdollar (referred to in the market as 6cable)!. %et)s say you expect the pound willgain (6strengthen)! against the dollar, so you buy (6go long)! the cable rate at ?.IKAB. Youbet >? per point that the pound will continue to strengthen against the dollar. 0y the endof the day, the rate has increased to ?.IIAB 1 a ?BB points rise. "t >? a point, this wouldhave made you a >?BB profit. 0ut e*ually, a drop to ?.IAB would have resulted in a >?BBloss and, as with the above example, you can lose far more than your initial stake, so it)s

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vital to have a stop-loss in place. You can hold your position for as long as you like 1 if atrade expires at the end of the day it can be rolled over.

0efore placing the bet, the spread-betting firm will ask for a deposit. This is usually amultiple of the agreed stake per point (sometime referred to as a 6notional trading

re*uirement), or JT=!. The more volatile the currency being traded, the higher the JT=.#f you were betting >? a point, with an JT= of 'AB (the range on ma5or currency pairswith +antor #ndex is anywhere between ?AB and ABB!, then the initial deposit is >'AB.

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ontracts for difference !F"s#

+Fs are very similar to spread bets 1 indeed, Jeil aldy of 9MTrade says they areessentially the same product/. You pay or receive the difference between the exchangerate for the nominated currency pair when the bet is opened and the rate prevailing when

the bet is closed. 7nce again trading is margin based. The key differences are that +Fsattract capital gains tax and margin re*uirements tend to be higher due to the largeraverage contract si:es. "lthough bid and offer spreads used to be significantly tighter for+Fs, with the emergence of more and more spread betting brokers this is no longer ama5or benefit.

"t the moment currency +Fs can only be accessed in the traditional way, over thecounter/ - in effect a deal directly between you and a bank or broker. This is set tochange later this year with the arrival of currency +Fs listed on the %ondon $tock9xchange. The main advantages will be the ability to trade through any broker, notnecessarily a specialist, improved transparency (since the contract will have a *uoted

price! and guaranteed stop losses.

o$ered warrants

#f the thought of losing *uite large sums *uickly, or having to negotiate expensive stoplosses is off-putting, then covered warrants for currencies are available on the %ondon$tock 9xchange as an alternative, although the market is fairly small. These productsallow you to take a view on a currency strengthening or weakening in relation to a fixedstrike/ price by a specified date ($ociete enerale)s 'BB contracts expire on ?A Nune or'? ecember!.

$o if you think that sterling might appreciate short term against the dollar you could buya 0@G2$ call (5argon for the right to buy/! warrant expiring in Nune. 9*ually if youbelieve sterling will fall or weaken then you would buy the put/ (right to sell/!. Themain potential advantage of warrants over spread bets only becomes apparent if you getthe currency direction wrong. =ather than facing unlimited losses, the warrant expiresand you 5ust/ lose the up front premium (though that)s still ?BBD of your initialinvestmentO!.

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%xchange traded funds !%TFs#

For those investors who feel uncomfortable with derivatives there is now another way totrade currencies, the exchange traded fund.

"lso known as currency shares, the FT reckons that these Jew York $tock 9xchange-listed securities are a li*uid and cheap way to track the movements of eight currenciesagainst the 2$ dollar, those being8 the 9uro, Yen, $terling, $wiss Franc, ;exican @eso,$wedish 3rona, "ustralian and +anadian ollars. %ike other 9TFs there is no stamp dutyon purchase and, unlike spread bets, an open position can be maintained without theexpense of having to roll it over beyond a fixed expiry or delivery date. owever, being ashare, any profits attract capital gains tax and the gains themselves are in 2$ dollars,which is not ideal for 23 investors.

The basic mechanics are straightforward enough8 if you think that the 9uro willstrengthen against the 2$ dollar you could buy the euro currency share (via a 2$ broker

like +harles $chwab!. "s the 9uro strengthens the share price rises until the 9TF is soldrealising a gain net of any spread.

Those investors tempted to participate in a version of the much publicised carry trade/(whereby hedge funds, for example, borrow in a low yield currency to invest in anothertypically with a much higher interest rate and pocket the difference! can also now do so.The &owershares urrency Har$est Fund(";9L0P! tracks an index that goeslong of the ?B currencies with the highest interest rates and simultaneously short thosewith the lowest. 7ver the last ?B years returns have averaged ??.?D versus 5ust K.Q' forthe $R@ ABB.

Forex trading: Where to start

The key to successful forex trading, as @hilip 0attley of ;oney"; puts it, is practice,practice, practice/. ;ost spread-betting firms offer demonstration accounts that let youhone your skills before trading for real, including+;+ ;arketsand +apital $preads.$tick initially to the commonly traded currency pairs, such as 2$GN@Y, 92=G2$ and0@G2$ 1 it)s generally easier to keep an eye on the news flow that might affect theserates. "nd one thing we can)t emphasise enoughL make sure you protect yourself with astop-loss.

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