I like to think that I am pretty well versed on investment vehicles and different markets, but the one area which I have remained woefully ignorant is that of currency (forex) trading.
So my question, how does it work?
It strikes me that forex trading is largely news based. You hear theres an earthquake in Japan? Yen is gonna fall. You hear on the news that Euro value is tumbling? Short euro, or buy in historically safe havens that have been known to rise ( a.k.a. Canadian loonie, swiss franc) and sell once it rises.
It seems like Currency Trading is almost totally based on Macro-economics.
It also strikes me that since there are not nearly as many currencies as there are stocks/bonds/derivatives etc etc, there must be a large number of market players in each currency bracket. So logically, currencies must be very liquid true?
Also, what is the risk of Currency trading, high or low? When I read the business section every day I notice that the Canadian loonie moves hardly a tenth of a cent on a regular basis (in comparison to the US dollar). So it seems like theres very little room for growth in currencies unless you leverage. On that note, whats the maximum leverage permitted for forex trading. I know in stocks its x2, and in derivatives its x10. Whats maximum leverage in currency trading?
I ask because I found out theres an international money trading club in my high school that I am tempted to look into but I am woefully ignorant on the reasons currencies rise or fall in value.
Thank you,
-Karmo, economics wannabie
P.S. Do not hesitate to give me a long answer. In fact, I encourage it!