Currency Trader Job Description

The market for trading foreign currency in the foreign exchange market (FOREX) is the largest, most liquid financial market in the world. The amount traded exceeds all the world's equity markets combined. Due to evolution of Internet based trading platforms, this market is no longer exclusively available to investment professionals and continues to expand rapidly.

Definition

The job of a foreign currency trader is to buy and sell foreign currencies and make a profit on changes in foreign exchange rates. A foreign currency trader works for a bank, brokerage company or independently.

Function

Currencies are traded in pairs e.g "GBP/USD" represents the value in Great Britain Pounds of a US Dollar. This number is called "the exchange rate". If a foreign currency trader believes that GBP is undervalued relative to the USD, he will buy the GBP/USD "pair" and sell it if the GBP appreciates, hence making a profit on the difference in the purchase and sale price. If the GBP weakens relative to the USD, the trader will be carrying a loss in that position.

Analysis

Foreign Currency traders use "technical" or "fundamental" analysis (or a combination of both) of economic data to predict the future direction of the FOREX market.

Technical Analysis assumes that the market is completely efficient and hence all factors that could move a currency's value are already priced in. This means that how a currency pair has moved in the past will be a good indicator of how it will move in the future, and so the trader will analyze graphs of historical data to predict these small movements and make a profit.

Fundamental Analysis looks at a country's economic indicators, current political situation and any other factors that might affect the value of its currency. Such economic indicators are the Central Bank Interest rate, the unemployment rate and the inflation rate. In the same way that stock traders look for valuations based on perception instead of reality, a currency trader using fundamental analysis will attempt to profit on such inefficiencies in the market.

Strategy

Due to the huge liquidity of the FOREX market, foreign currency traders can "leverage" (or borrow), meaning they are able to buy more of a foreign currency than the capital they put into the trade. Hence the trader can gain greater exposure and profit from smaller movements in the market. The flip-side of this leverage is that there is potential for huge losses if the market moves in the opposite direction. For this reason, a foreign currency trader will have a clearly defined strategy and a pre-determined exit price should the trade result in a loss. Ultimately there is no crystal ball when it comes to predicting the movement of financial markets and even the most experienced traders are wrong a certain percentage of the time.

Summary

The attractiveness of the FOREX market is because the barriers to entry are very low, it is open 24 hours and traders can open and close positions immediately. Currency traders can gain easy access to leverage, so they can achieve short term profits more quickly than with traditional investing in Blue Chip stocks. Successful traders tend to have strong mathematical and research skills and are able to stick to a pre-determined strategy, even when the market is moving against them. They maximize the upside potential of each trade whilst controlling downside risk, thus ensuring the best possible result for themselves and their clients.

References

• New York Federal Reserve: The Basics of Foreign Trade and Exchange
• State Street Canada: Foreign Exchange