What Is Electronic Currency Trading?
Electronic currency trading is a method of trading currencies through an online brokerage account or via an online currency exchange. Trading electronically greatly increases access to markets, lowers trading costs, streamlines trading confirmations and settlement, and ensures forex markets can operate globally 24/7 without interruption.
Key Takeaways
- Electronic currency trading allows forex trading over the internet via online brokers and currency exchanges.
- Electronic trading maintains global access to the 24/7 FX market and promotes greater trading efficiency at lower cost for traders.
- While not every currency pair is available for electronic trading, by far, most of the world’s forex trading volume is now electronic.
Understanding Electronic Currency Trading
Electronic currency traders use analysis based on technical and fundamental indicators to help them forecast the movement of the currency pair being traded. Because currency trading by this method is wholly electronic, execution speeds are extremely fast, allowing the trader to quickly buy and sell currencies to cut losses and take profits at a moment’s notice.
Electronic currency trading happens 24 hours a day and is only closed in some markets from Friday evening to Sunday evening. The 24 hours of trading is actually comprised of three sessions that include the European, Asian and United States trading sessions. Although there is some overlap in the sessions, the main currencies in each market are traded mostly during those market hours. This means that certain currency pairs will have more volume during certain sessions. Traders who stay with pairs based on the dollar will find the most volume in the U.S. trading session.
The forex market was among the very first important financial markets to become 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 now 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 happens in pairs. Unlike the stock market, where you buy or sell single stops at a time, you have to buy one currency and sell another currency in the forex market. Most currencies are priced out to the fourth decimal point. A pip or percentage in point, is the smallest increment of trade. One pip typically equals 1/100th of 1 percent.
Beginning traders often trade currency in micro lots, because one pip in a micro lot represents only a 10 cents move in the price. As such, these low stakes make losses easier to manage if a trade doesn’t produce the intended results. 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 the potential losses to the small investor much 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 the 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 far less trading options makes trade and portfolio management an easier task.
Special Considerations
Not all currencies can be exchanged or converted into one another. Some countries have monetary policies that place restrictions on the convertibility of their money. Such a currency is 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.
