Electronic Currency Trading

What Is Electronic Currency Trading?

Electronic currency trading is a method of trading currencies through an online broker or via an online currency exchange. Trading electronically significantly increases access to markets, lowers trading costs, streamlines confirmation and settlement times, and ensures forex markets can operate globally on a 24/7 basis without interruption.

Understanding Electronic Currency Trading

Electronic currency traders use technical and fundamental analysis to forecast the movement of the currency pair being traded. Because execution speeds are extremely fast with electronic currency trading, a trader can quickly buy and sell to cut losses or take profits at a moment's notice.

Electronic currency trading takes place 24 hours a day and is only closed in some markets from Friday evening to Sunday evening. The 24-hour trading session is actually comprised of three sessions in Europe, Asia and United States. Although the sessions overlap some, the main currencies in each market are traded mostly during their respective market hours. This means certain currency pairs will have more volume during certain sessions. Traders who stay with pairs based on the greenback will find the most volume in the U.S. trading session.

The forex market was among the first to go electronic, with screen-based trading appearing on Wall Street FX desks in the early 1990s. Not long after, several other important markets began electronic trading in earnest, such as the NASDAQ stock exchange. Today, nearly all trading in forex and elsewhere is electronic. Forex traders have access to several software platforms for charting, forecasting, and automating trades placed electronically through any number of currency trading platforms.

Electronic Currency Trading Pairs

Electronic currency trading occurs in pairs. Unlike the stock market, where you buy or sell single stops at a time, in the forex market you buy one currency while selling another. Most currencies are priced out to the fourth decimal point. A pip (or percentage in point) is the smallest increment of trade. One pip equals 1/100^th of 1 percent.

Beginning currency traders often trade micro lots, because one pip in a micro lot represents only a 10-cent move in price. As such, these low stakes make losses easier to manage. In a mini lot, one pip equals $1 and that same one pip in a standard lot equals $10. Some currencies move as much as 100 pips or more in a single trading session, making potential losses to the small investor more manageable by trading in micro or mini lots.

The majority of the volume in currency trading happens in 18 currency pairs, compared to the thousands of stocks available in the global equity markets. Although there are other traded pairs outside of these 18, the eight currencies most often traded are the U.S. dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and the Japanese yen (JPY). Although nobody would say that currency trading is easy, having fewer trading options makes trade and portfolio management easier.

Special Considerations

Not all currencies can be exchanged or converted into another. Some countries have monetary policies that restrict the convertibility of their currency. These currencies are said to be nonconvertible or blocked. Some brokers may not handle the exchange of currencies for a contract for differences (CFD). During the settlement in a CFD futures contract arrangement, cash payments substitute for the delivery of the asset.