CURRENCY TRADING: THE BASICS

The Chicago Mercantile Exchange is an international marketplace enabling institutions and businesses to manage their financial risks and allocate their assets. On its trading floors, buyers and sellers meet to trade futures contracts through the process of open outcry. The "Merc's" diverse product line consists of futures within four general categories: Foreign currencies, interest rates, stock indexes and agricultural ( including live stock).

The International Monetary Market division is the marketplace for currency trading in the Canadian Dollar, Swiss Franc, Japanese Yen, British Pound, Brazilian Real, Deutsche Mark, Mexican Peso and Euro Dollar. The exchange opens at 8:20 a.m. Eastern Standard Time ( 5:20 a.m., Pacific Standard Time ) and closes at 3:00 p.m. Eastern Standard Time (12:00 noon, Pacific Standard Time ).

Currency Contracts

Currency, like other commodities, are traded in futures contracts. Simply, these are contracts to deliver a fixed amount of a particular currency, in a given month in the future, at a price agreed upon and paid for today. Consequently, you are really buying and selling a contract (written agreement ) rather than the physical currency. You can think of the contract as a written document that says, "I promise to deliver, to the owner of this contract, 125,000 Japanese Yen on June 16th, 2002".

Below are a list of the currencies being traded today on the CME

The "ticker" symbols you see above are used as a form of shorthand for the contracts and their delivery months. All currencies are traded in four contract months and are listed below:

Month / Symbol

March (H)

June (M)

September (U)

December (Z)

For example, instead of writing " June Japanese Yen" we use the symbol JYM (contract, then month ).

Change Over Days - Day Trading

The last trading date prior to delivery ( the last day the contract is traded ) is the Monday preceding the 3rd Wednesday of the contract month, however, most day traders switch over to the next contract month the Monday before the 2nd Wednesday. You must remember to change the symbol on your chart and your verbal order starting the Monday before the 2nd Wednesday in order to be trading the correct month.

Leverage

In the futures market you use leverage to buy a contract. The value of a contract of 125,000 Swiss Franc is approx. $100,000. As a day trader you are allowed to buy or sell this contract for only $1,000 as long as you get out of the market by the end of the trading day. Your one thousand dollars per contract is kept in your margin account with your broker as a security deposit against any loss. At the end of the day, your account is reconciled and any profits you made are added to your account. Remember, as a day trader all contracts are closed before the end of the day. If you hold a contract overnight, margin requirement may be as high as $4,000 per contract.

Floor Traders

Each individual currency is traded through a small group ( 50-60 ) floor traders representing various brokerage firms and institutions that all have seats on the exchange. This means you can not buy or sell this currency without these floor traders. In essence, they control the market. At any moment of time, they have a buy price and a sell price ( bid and ask ). In order to understand this better, lets say that they are trading the Japanese Yen and are bidding .6212 to buy Japanese Yen and asking .6214 to sell the Japanese Yen. If you offer to sell at 6212 they will buy. If you offer to sell at 6213, they may buy or may refuse. If you offer to sell your shares at "market" you may get 6212, or you may only get 6211 or 6210! There is no regulation - anything goes.

Commodity Brokers

In order to execute a trade on the exchange you must first establish a commodity trading account with a commodity broker. Commodity brokers range from full service, usually charging $40-80 per round trip, to discount and online brokers who may charge as little as $9 per round trip per contract. All commodity brokers should have a direct line to the trading floor of the CME and be able to execute an order within 30 seconds of your order being called in.