The Hindu Business Line : Enter the largest financial market

To Norman O. Brown, "All currency is neurotic currency." Thankfully, Stephen Sondheim says, "I prefer neurotic people. I like to hear rumblings beneath the surface."

So, take a dip into, Getting Started in Currency Trading, a guide to `winning in today's hottest marketplace' by Michael D. Archer and Jim L. Bickford, from Wiley (www.wiley.com).

But before you enter "the exciting, complex, and sometimes profitable realm of trading world currencies on the foreign exchange (forex) markets," the authors caution: "Currency trading may not be to everyone's disposition." For, forex is "the purest of all speculative adventures." But what is a forex deal?

Welcome to "the largest financial market in the world," where deals are the simultaneous buying of one currency and selling of another.

With a volume of over $1.95 trillion daily, the forex market is "more than three times the total amount of the stocks and futures markets combined." There is no physical exchange, please note; this is a 24-hour market, spanning time zones.

Major and minor currencies

Major currencies, in the descending order of trading volumes, are seven — US dollar, euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD) and Australian dollar (AUD).

These are symbols for each of them (The first two letters refer to the country and the third the currency.) "All other currencies are referred to as minors." Among the minors, `the most frequently traded' ones are NZD, ZAR and SGD, that is, the New Zealand dollar, the South African rand, and the Singapore dollar.

Okay, who trades on the forex market? Two groups — `companies and governments', and `investors'.

A miniscule 5 per cent share is of the first group, mainly for hedging, while the bulk (95 per cent) is by investors for profit or speculation. "Speculators range from large banks trading 10,000,000 million currency units or more, to the home-based operator trading perhaps 10,000 units or less."

The authors trace currency trading to ancient Egyptians, who introduced coinage. "By biblical times, the Middle East saw a rudimentary international monetary system when the Roman gold coin aureus gained worldwide acceptance followed by the silver denarius, both a common stock among money changers of the period."

More than 90 per cent of forex transactions are cash/spot, "liquidated within 48 hours," informs the book. "Currency trades held longer than this are normally routed through an authorised commodity futures exchange such as the International Monetary Market (IMM)."

The authors devote chapters to forex terms (such as currency pairs, pips, ticks, bid/ask spread, and rollover), selecting a forex broker, and opening an online trading account. In `mechanics of forex trading' read about order types; the `basic' ones are market, limit, limit entry, stop-loss, and take profit orders.

The `esoteric' category has GTC (good till cancelled), GFD (good for the day), and OCO (order cancels other).

`Rubber meets the road' in a chapter titled `the calculating trader', where the authors teach you to track your own P&L (profit and loss), "tick by tick as the market fluctuates".

The smallest price change that any currency pair can move in either direction is called pip. "In the forex markets, profits are calculated in terms of pips first, then dollars second."

Part 3 of the book is thoughtfully named `how to beat the market (maybe)', and it includes chapters on both fundamental and technical analysis.

Essential read is part 4, on `the business of trading'. Here's where you learn about trading tactics, money management and psychology, and record keeping.

According to this year's Oscar winner for best actor, Philip Seymour Hoffman, "The only true currency in this bankrupt world is what you share with someone else when you're uncool."

So, `what to do if things go wrong'? The book lists `common trading mistakes' and presents guidelines to correct errors.

Trading sins

First on the list of gaffes is trading without a stop-loss limit order.

"In the event of a power outage, you may receive a margin call in the time it takes to reboot your computer." Margin call is `the trader's nemesis'; it occurs "when the broker notifies the trader that his or her margin deposits have fallen below the required minimum level because an open position has moved against the trader."

Another sin is to trade too many pairs at one time. "It clutters up the screen (and the trader's attention) when five or more bar charts are displayed simultaneously."

The authors advise against `trading in very obscure cross rates,' such as USD-HUF (Hungarian forint) or SAR (Saudi riyal).

Words are the coins making up the currency of sentences, and there are always too many small coins, frets Jules Renard. Valuable coins, though, one may say of the words in the book.

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