Buying some Euros

Bought the EUR/USD at 1.3947 for an overnight trade.

Currency trading is very cool. It goes on worldwide, 24 hours a day for 5 days a week. Most of the volume happens in the morning in the U.S. when the U.S. and European traders are active. Its the largest market in the world, dwarfing all the stock markets. Trillions of dollars flow in the currency markets. Its a market that is too large to be manipulated in the way that the stock market can be.

When you trade currency you always buy one thing and sell another. You buy Swiss Francs and sell Canadian dollars, or whatever, so you are always long one thing and short another. These are called the "pairs". The largest pairs are the ones between the Dollar, Euro, Yen, British Pound and Swiss Franc. The ticker is always ONE/OTHER, in this case EUR/USD for Euro and US Dollar. When you buy EUR/USD you are going long the Euro, when you sell EUR/USD you are going short the Euro.

Trading occurs in units called "pips", where each pip represents one tick of change. The prices for most pairs are expressed as 4 decimal points of value, e.g. 1.3947 for my EUR/USD pair. 1 pip is the 4th decimal place of value. This means that one Euro is worth $1.3947 cents, so you trade in hundredths of a penny in this case.

You can buy or sell as little as $10,000 worth at a time, and you get 50 to 1 leverage, which means a $10,000 trade only costs $200. The standard size trade is $100,000 at a time, which costs $2,000 to place, using the magic of leverage.

Leverage lets you get extraordinary returns -- and losses. In an IRA or 401k there is no leverage and you think in terms of making, say, 8% a year or better. If you are an active swing or trend trader you probably have 2 to 1 leverage and you'd like to make 20% or more a year. If you day trade you have 4 to 1 leverage and you think about making an income, with returns that work out to a a couple of hundred percent a year on your capital. If you trade futures you have 10 to 1 leverage, and currency (or 'Forex') trading involves 50 to 1 leverage. Currency and futures are how fortunes are made -- and lost -- trading.

I'm just dipping my toes into this so I'm starting with the $10,000 sized lots. With that size of trade each pip is $1. In the time since I've placed this trade the price has moved to 1.3957. That is 10 pips of movement, 1.3957 - 1.3947 = 10 pips = $10 of price movement.

Now remember, that trade cost me $200 and its already moved $10. That's a 5% move in about 10 minutes! For comparison's sake if I had a CD that paid 2% I could earn $4 on $200 in a year.

At 1 am early this morning the EUR/USD was 1.408, or 133 pips higher than my position entry. If it returns to that value tomorrow I would make a 66% return on my $200, or $133. Of course, if it dropped that much I would lose 66% in a day.

That sort of movement (100 pips) is very small. Its a very small move amplified by leverage.That sort of return is part of the allure of currency trading.