Page 284 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 14: Currency/Forex Market

used by the majority of the industry’s brokers. For example, it is possible for an investor to Notes
control a position of US$100,000 by putting down as little as US$1,000 up front and borrowing
the remainder from his or her broker. This amount of leverage acts as a double-edged sword
because investors can realize large gains when rates make a small favourable change, but they
also run the risk of a massive loss when the rates move against them. Despite the risks, the
amount of leverage available in the forex market is what makes it attractive for many speculators.
The currency market is also the only market that is truly open 24 hours a day with decent
liquidity throughout the day. For traders who may have a day job or just a busy schedule, it is an
optimal market to trade in. As you can see from the chart below, the major trading hubs are
spread throughout many different time zones, eliminating the need to wait for an opening or
closing bell. As the U.S. trading closes, other markets in the East are opening, making it possible
to trade at any time during the day.
Time Zone Time (ET)
Tokyo Open 7:00 pm
Tokyo Close 4:00 am
London Open 3:00 am
London Close 12:00 pm
New York Open 8:00 am
New York Close 5:00 pm

While the forex market may offer more excitement to the investor, the risks are also higher in
comparison to trading equities. The ultra-high leverage of the forex market means that huge
gains can quickly turn to damaging losses and can wipe out the majority of your account in a
matter of minutes. This is important for all new traders to understand, because in the forex
market – due to the large amount of money involved and the number of players – traders will
react quickly to information released into the market, leading to sharp moves in the price of the
currency pair.
Though currencies don’t tend to move as sharply as equities on a percentage basis (where a
company’s stock can lose a large portion of its value in a matter of minutes after a bad
announcement), it is the leverage in the spot market that creates the volatility. For example, if
you are using 100:1 leverage on $1,000 invested, you control $100,000 in capital. If you put
$100,000 into a currency and the currency’s price moves 1 % against you, the value of the capital
will have decreased to $99,000 – a loss of $1,000, or all of your invested capital, representing a
100% loss. In the equities market, most traders do not use leverage, therefore a 1% loss in the
stock’s value on a $1,000 investment, would only mean a loss of $10. Therefore, it is important to
take into account the risks involved in the forex market before diving in.

14.2.3 Differences between Forex and Equities

A major difference between the forex and equities markets is the number of traded instruments:
the forex market has very few compared to the thousands found in the equities market. The
majority of forex traders focus their efforts on seven different currency pairs: the four majors,
which include (EUR/USD, USD/JPY, GBP/USD, USD/CHF); and the three commodity pairs
(USD/CAD, AUD/USD, NZD/USD). All other pairs are just different combinations of the same
currencies, otherwise known as cross currencies. This makes currency trading easier to follow
because rather than having to cherry-pick between 10,000 stocks to find the best value, all that
FX traders need to do is “keep up” on the economic and political news of eight countries.

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