If you are interested in trading currency, you may be looking at the foreign exchange (forex) and
You can choose from thousands of currencies, multiple trading platforms, and hundreds of types of financial instruments, including options and low-cost derivatives like CFDs.
To make a profit, you need to understand the differences between the two markets as well as the pros and cons of trading in them.
Once you understand the basics of the markets and of trading, it’s relatively easy to get started .
What Are the Forex and Cryptocurrency Markets?
The forex (foreign exchange) market allows you to trade fiat currencies. The cryptocurrency market allows you to trade digital currencies.
What Is the Forex Market?
Forex is a decentralized market where participants (primarily large international banks) buy, sell, and exchange currencies. It is the largest market by volume and the most liquid one in the world, with an average of $5.3 trillion traded every day.
You have probably already participated in the forex market. For example, if you have ever travelled to a foreign country, it’s likely that you converted some of your local currency into the currency of the country you travelled to. The act of exchanging your currency was a transaction in the forex market.
There are several ways to trade forex:
● The Spot Market: The spot market allows participants to convert one currency to another at an agreed-upon-rate. The settlement date is usually T+2 (the trade date plus two business days). There are 6 currency pairs that settle at T+1: USD/CAD (US dollar / Canadian dollar), USD/RUB (US dollar / Russian ruble), USD/PHP (US dollar / Philippine peso), USD/TRY (US dollar / Turkish lira), USD/PKR (US dollar / Pakistani rupee), and USD/KZT (US dollar / Kazakhstan tenge).
● Currency futures: Futures are standardized contracts where two parties agree to buy/sell assets at a future date at a predetermined price. The size and settlement dates are set by public commodities markets. There may be multiple (fixed) maturity dates.
● Forward Contracts: Forward contracts are similar to futures, but the contracts are drafted over-the-counter (OTC) — that is, the two parties determine the terms of the agreement themselves. The forward exchange market offers contracts that ensure future delivery of a currency at a specified rate, which is called the forward rate.
● Currency Options: Options are similar to futures. They allow traders to hedge without having to buy or sell when the contract expires.
● Currency ETFs and Multi-currency Mutual Funds: These give the trader or investor exposure to a basket of currencies.
● Currency Swaps: A currency swap occurs when two parties agree to exchange interest and sometimes principal in two different currencies. They pay the interest on a loan made in the currency of their partner, allowing the parties involved to pay less on their loans than they would have by borrowing locally and converting the currency.
FX Trading: Currency Pairs
Traders (also called day-traders) can use brokers and FX trading platforms to speculate on the future price movements of the exchange rate between two currencies. Because two currencies have to be involved in order to have an exchange rate, this type of trading is also called “trading currency pairs.”
Trading FX is similar to trading stocks and ETFs. You’ll need to decide whether to buy or sell the underlying asset, and you’ll need a live chart and some knowledge of fundamental and technical analysis to get started .
The so-called “major pairs” (each of which includes the US dollar) are the most heavily traded.
Some consider there to be 4 major currency pairs, and others consider there to be six:
1. USD/JPY (US dollar / Japanese yen) – This trade is called the “dollar yen”
2. EUR/USD (Euro / US dollar) – This trade is called the “euro dollar”
3. GBP/USD (British pound / US dollar) – This trade is called the “pound dollar”
4. USD/CHF (US dollar / Swiss franc) – This trade is called the “dollar swissy”
5. AUD/USD (Australia dollar / US dollar) – This trade is called the “aussie dollar”
6. NZD/USD (New Zealand dollar / US dollar) – This trade is called the “kiwi dollar”
There are also “cross-currency” pairs which don’t include the dollar. The main currencies traded in these are the GBP, the JPY, and the EUR.
Cross-currency pairs can be categorized as:
● Euro crosses (includes the euro and excludes the yen)
● Pound crosses (includes the pound and excludes the euro and yen)
● Yen crosses (includes the yen)
Examples of cross-currency pairs include:
● EUR/CHF (Euro / Swiss franc) – This trade is called the “euro swissy”
● EUR/JPY (Euro / Japanese yen) – This trade is called the “euro yen”
● GBP/NZD (British pound / New Zealand dollar) – This trade is called the “pound kiwi”
There are also “exotic pairs” which are less commonly traded. These include:
● USD/BRL (US dollar / Brazil real) – This trade is called the “dollar real”
● USD/SNG (US dollar / Singapore dollar) – This trade is called the “dollar sing”
As with stock trading, you can get started in forex trading for $100 or less. There are many platforms to choose from such as Plus500, IG.com, Interactive Brokers, and Forex.com.
By contrast, futures and options can be expensive and have margin requirements.
The release of public economic reports such as those on GDP, inflation, and unemployment can impact currency markets. So can decisions about trade wars and other geopolitical events. So you might want to use a “ squawk ” service while you trade, so you can be among the first in the world to hear news as it unfolds.
The Cryptocurrency Market
The cryptocurrency market is also decentralized. The market runs on a network of computers, with the cryptocurrencies involved stored in wallets.
Here are some of the key ways you can participate.
● Contracts for Difference: These are derivatives that allow you to speculate on the movement of crypto prices without having to own the underlying currency. Select a reputable, government-regulated broker like Interactive Brokers or Plus500.
● Futures and Options: You can trade bitcoin futures and options on the Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE). These U.S.-based exchanges are regulated by the Commodities Futures Trading Commission ( CFTC ) and they are cash-settled. There are also minor exchanges, some of which are regulated (like Kraken) and some of which are not. These exchanges allow you to trade altcoin futures as well, like ethereum, litecoin, XRP, and bitcoin cash.
● Over-the-Counter: Buying and selling coins directly.
Example: Trading With eToro
Like forex, you can get started trading with little money. For example, eToro broker, a government-regulated broker, offers multiple ways to start trading cryptocurrencies for as little as $25.
● You can buy or sell 14 different cryptocurrencies, without a digital wallet.
● You can “copy” the successful trades of top traders on their platform.
● For those who want to hold crypto, you can copy different portfolios they offer that provide a combination of cryptocurrencies to invest in.
● You can even trade crypto-fiat currency pairs.
The Forex Market vs the Cryptocurrency Market
Though both forex and cryptocurrency markets serve as media of exchange, they are influenced by different factors, and the results of these influences vary.
Both FX and cryptocurrency markets are volatile which makes them ideal for traders.
Pips and Profits
With FX trading, the major currencies display the greatest volatility usually. It’s important to realize that changes in FX values are measured in “pips.” A pip is similar to a tick, which is a measurement of upward or downward movement in a security. You can think of a pip as a price “notch.”
Typically, FX pairs are priced up to 4 or 5 decimals. The pips are fluctuations measured at the fourth decimal. For example, at the time of this writing USD/CHF is at .96088. During a typical trading session the exchange rates of major currency pairs may fluctuate by 50-100 pips or more.
The Crypto Rollercoaster
Cryptocurrency markets are also known for their volatility . Bitcoin for example, has seen price movements as steep as over 90%.
For example, since the mid-March market plunge caused by the coronavirus, bitcoin futures (BTCM20) nearly doubled in price.
Interestingly, neither crypto nor fiat currencies have intrinsic value.
Leverage allows you to trade more capital than you currently have via borrowing.
With forex and crypto, you can get higher leverage that you could with alternative investments, such as stocks. For example, forex trading usually allows leverage ranging from 50:1 to 400:1 (e.g., with just $1, you can take a trading position of $400). Crypto trading platforms allow leverages up to 100:1.
Profit Potential and Risk
Volatility and leverage produce a high level of risk. Leverage amplifies both profits and losses. The more volatility in the market, the greater profits and losses will be.
The forex market is the most liquid market in the world. Trades normally happen instantaneously. The cryptocurrency market is not as liquid because crypto is not the official currency of any country.
Hedge Against Inflation
Fiat currencies are sometimes traded as hedges against inflation.
As an example of how to use forex to hedge against inflation, one might look for a country with robust free trade policies, whose central bank policies are hawkish, and whose goods are rising in cost, and trade it against a poorer performing currency. (This type of trading, of course, depends on current market conditions.)Can cryptocurrencies also be used to hedge against inflation? Consider bitcoin’s notorious volatility: it can suddenly plunge over 90%. That hardly makes for a stable store of value that maintains one’s purchasing power.
And yet, this May, billionaire investor and hedge fund founder Paul Tudor Jones announced that he was investing 1-2% of his assets in bitcoin futures ( BTCM20 ) traded on the Chicago Mercantile Exchange (CME).
In a letter to investors , Jones warned of the “Great Monetary Inflation” that he expects in the wake of trillions of dollars being spent on stimulus, bailouts, and quantitative easing.
Jones discussed various traditional hedges like gold, US Treasurys, the NASDAQ 100, AUD/JPY, and, yes, bitcoin.
However, Jones’s position is controversial and he knows it. It’s important to realize that he described his position to be a “great speculation.”
Both the cryptocurrency and forex markets allow you to trade currencies, and despite the differences there are a surprising number of similarities between the two.
The right market for you depends on your goals and your risk tolerance. Both markets provide the volatility sought after by day traders