FX, or currency trading, is the up and coming market for investors who are flocking to it from all over the world. The largest and most fluid market in the world, FX trading happens 24 hours a day, five and a half days a week. Which gives all investors from beginners to pros plenty of opportunity to get involved. There’s still a lot to learn, however. So if terms like FX, bullish, bearish, calls, puts, going long, going short, exchange rates make your head spin. You’ve come to the right place.
If you’re interested in getting started in FX trading or simply want to know the best time to exchange your money from one currency to another, knowing the jargon that’s commonly used in the marketplace will only help you toward success. Essentially, it should help you save money. Read on to learn some of the most common terms used by FX traders and how they’ll affect you, your trades and your money.
FX trading, also known as Forex trading, is the trading of world currencies on the foreign exchange market. The foreign exchange market is different from other large markets, like stock exchanges, in that it’s not an actual, physical place. With FX trading, exchanges happen online in person-to-person trades.
Because currencies are exchanged all over the world, trading happens pretty much constantly. Everyone from businesses that operate internationally to tourists do it, which means the foreign exchange market rarely sleeps. Trading takes place at all hours for five and a half days a week in major financial hubs across almost all of the world’s major time zones: London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.
The constant demand for currency exchange also makes the foreign exchange market the largest and most fluid in the world, trading more than the equivalent of $4.9 trillion US dollars every day. It’s a fluid market, which means it’s easy to trade quickly and at a desirable price because there are so many buyers and sellers. Also, in fluid markets, the selling and buying of assets by individual traders doesn’t necessarily have a significant impact on the exchange rates. FX trading is considered to be one of the most fluid markets in the world because of the sheer number of exchanges that happen every day. However, this doesn’t mean that the market is stable. Currency values are highly vulnerable to events in the political and economic sphere and oftentimes one seemingly small event can sway the value a currency. That’ why it is important to understand the most commonly used jargon that investors use while talking about currency value while making deals.
“Bullish” is a term used to describe an investor who thinks the value of a currency is going to rise, and therefore is looking to invest in that currency. Bullish investors will generally be looking to buy a specific currency.
A bullish investor wants to buy.
The opposite of “bullish,” “bearish” describes traders who think that the value of a currency is going to fall, and therefore want to sell that currency.
A bearish investor wants to sell.
Just like bullish investors want to buy, a bull market is a market in which currency values are rising or are expected to rise.
A bear market, as you might imagine as the opposite of bullish, is a market in which currency values are falling or are expected to fall.
Calls allow their holders the right, but not the obligation, to buy a currency at a certain exchange rate in the future. If an investor is buying a call, he or she expects the value of the currency to increase, raising its exchange rate. The call means the investor will get a better deal on the currency if its value does increase. This is because the investor is able to buy it at the rate that was set while buying the call.
Puts are simply the opposite of calls - they allow their holders the right, but again, not the obligation, to sell a currency at a certain exchange rate in the future. Investors who buy puts expects the value of the currency to fall, and therefore the put will help them cut their losses by selling it at a predetermined price.
Let’s look at a simplified example showing how the investor might make a decision to call or put.
Imagine an investor who thinks that the value of the British pound will rise in the near future. In this case, he or she will buy a call option on the pound at a given price - say 50 GBP - plus a premium of few cents.
What this gives him is the right to buy a currency at 50 GBP in the future until a specified date. Until that date, even if the currency rate goes up - say to 100 GBP - the investor is still able to buy british pounds at 50 GBP, giving him a profit of 50 GBP minus the premium made for the currency call option.
The put option does the opposite. The investor expects the currency to fall and therefore buys the put option so he or she could sell the currency at higher price even when the actual value has fallen.
“Going long” on the FX market means buying a currency because you expect its value to rise. If you are “already long”, then you’ve bought the currency and now own it.
“Shorting” on the FX market is opposite side of the coin. Shorting means you’re selling a currency.
Which means, when you need to “go long” (buy) one currency, you “short” (sell) another currency.
When exchange rates on the foreign exchange market are described, they’re written as the relationship between the values of 2 different world currencies. When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent in that currency.
For example, if a trader wants to determine the exchange rate between the US dollar (USD) and the Indian rupee (INR), a quote might look like this:
> USD/INR = 65.00
To put it another way:
$1 = ₹65.00
1 US dollar buys 65 Indian rupees
This quote is only that. A quote. And it’s only valid for the moment that you read it. Which means that as the market moves, the numbers will change from minute to minute. If the Indian rupee yen number gets larger, it’s good news for the dollar as it would mean that the dollar value has increased and therefore you can buy more rupees for less dollars.
When trading on the FX market, you’ll likely see different exchange rates for currencies depending on whether you want to buy them or sell them. This means that quoted exchange rates on the FX market are almost always a little bit different from the mid-market rate, which is the actual exchange rate for the currency. It’s determined by the midpoint between supply and demand for that currency.
The mid-market rate can be called many things: interbank rate, spot rate, mid-market rate — but they are all the same thing. It’s also the rate you’ll see if you Google the exchange rate for the 2 currencies. It’s considered to be the fairest possible exchange rate available for a any currency pair.
When you’re buying a currency, you’ll want to look for a quote that’s as close to the mid-market rate as possible, because that means you’re not paying much of a markup on your currency. And you’re getting a good deal on the buy. When you’re selling a currency, you want to quote an exchange rate that’s higher than the mid-market rate, because that means you’re making money on the currency you’re selling. This is often what banks and international money transfer services do to make sure they aren’t losing money. They markup the exchange rate. This markup that transfer services and banks add to the exchange rate is called a spread, and it’s often 4-5% higher than the exchange rate you find on Google.
A simple way to get started trading on the FX market: TransferWise borderless multi-currency accounts
For FX traders, or generally for anyone who deals with money in different currencies, a good tool to consider is a TransferWise borderless multi-currency account. The borderless account is a multi-currency account which allows users to hold, trade and manage money in tens of different currencies - all at once.
Most traditional multi-currency accounts allow their users to only keep 1 or 2 currencies at a time, which can complicate FX trading. A TransferWise borderless account can solve that problem. Not only are you able to store money in these different currencies, but also you convert the money to another currency, and/or send the money out to a bank account via a transfer at the mid-market rate for a very small fee. You can therefore manage risk on future payments by storing money in multiple currencies. When there’s favorable exchange rate, that means you can convert your money almost instantly on your borderless account and send it to where you want to.
Borderless account holders will soon also have access to consumer debit cards in early 2018, which will allow for easy spending from borderless accounts in multiple currencies in countries all over the world.
It’s important for all FX traders, from seasoned professionals to those just looking to make their first trades, to stay on top of current exchange rates, because you’ll want to constantly compare those to quotes and ensure you’re making the best possible deals on the FX market. It’s a good idea to sign up for some kind of tracker, like TransferWise rate alerts.
Now that you have a better grasp of some of the terminology commonly used in FX trading, you’re ready to hit the market and make your first trades. Good luck!
|This publication is provided for general information purposes only and is not intended to cover every aspect of the topics which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content is the publication is accurate, complete or up to date.|
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