Currency Trading Vs. Foreign Exchange Trading

Is currency trading with a forex broker the same as your local financial institution? Each entity consists of different set of rules, goals, and means. Majority of the currency trading executed with a forex broker is for the purposes of short-terms gains, large leverage to trade with, and multiple currency pairs to choose from. On the other hand, foreign exchanging at your local bank or financial institution is for the objectives of long-term positive yields and lower risk.

Forex Brokers

When you are currency trading online, you will be dealing with a forex broker. A forex broker works very similar to a bank but provides you with multiple currency pairs to choose from and trade with. The leverage a forex broker provides you with will allow any forex trader to create an inflated deposited amount. The leverage can range from 1:50, 1:200, and it is usually set at a maximum of 1:400. Leverage can be beneficial by giving you a larger fund to trade with but it also can be risky because it can diminish your account with only one. The forex broker fees are referred to as spreads and these spreads are different, depending on the currency pair you trade with. The four “major currencies” have the lowest spreads because they are popular and competitive.

The four major currencies are: EUR/USD, USD/JPY, GBP/USD, and USD/CHF

Short-term Gains

When trading a pair of currencies in the forex market, you are looking for short term gains within the timeframe of one to five days. You will not be holding your position on a long-term basis because the market is very volatile. A successful short-term gain strategy is to incorporate (i) fundamental and (ii) technical analysis.

(i) Fundamental analysis is finding the macro-economic news that would cause the traders to buy or sell, depending if the news is positive or negative.

If the forecast is greater then expected it would create a greater incentive to buy.

If the forecast is lower then expected it would make the traders go on a sell mode.

(ii) Technical analysis is the ability to draw the resistance lines on a chart of where the buyers have entered or exited the market. Finding the resistance lines is simply looking at the overall currency trend in the past one to three months and pin-pointing the trend highs and lows. In order, to confirm a strong uptrend then a resistance line from the upside would need to be broken, to give you the confidence to enter into a buy position. A strong downtrend occurs when a resistance line on the downside is broken, which brings a drop of confidence from the traders.

Long-term Gains

If you are looking for long-term gains with low risk, then you have the opportunity of exchanging your funds at your local bank. Many banks provide a foreign held currency account with competitive interest rates and fees. I would suggest searching online to find the lowest fee institution to exchange your funds with. As a long-term investor, you are looking at the timeframe of three to twelve months before seeing a credible opportunity. Long-term investors are exposed to less risk then the short-term gain seekers and are not held by a margin call.

Currency trading and foreign exchange are exposed to sets of advantages and disadvantages. It really comes down to the objective of your investment and intentions. The two entities carry a risk of you not being able to recoup your original investment, if you haven’t created a reliable strategy and deep analysis.