Cash and Currency

Cash is king, as they say. Its money thats readily available in your day trad-
ing account to buy more securities. For the most part, the interest rate on
cash is very low, but if you are closing out your positions every night, youll
always have a cash balance in your brokerage account. The firm will proba-
bly pay you a little interest on it, so it will contribute to your total return.
Money market accounts are boring. For day trading excitement, cash can be
traded as foreign currency. Every day, trillions (yes, thats trillions with a t)
of dollars are exchanged, creating opportunities to make money as the
exchange rates change. Currency is a bigger, more liquid market than the U.S.
stock and bond markets combined. Its often referred to as the forex market,
short for foreign exchange.
How currency trades
The exchange rate is the price of money. It tells you how many dollars it
takes to buy yen, pounds, or euros. The price that people are willing to pay
for a currency depends on the investment opportunities, business opportuni-
ties, and perceived safety in each nation. If American businesses see great
opportunities in Thailand, for example, theyll have to trade their dollars for
baht in order to pay rent, buy supplies, and hire workers there. This will
increase the demand for baht relative to the dollar, and it will cause the baht
to go up in price relative to the dollar.
Exchange rates are quoted on a bid-ask basis, just as are bonds and stocks. A
quote might look like this:
USDJPY=X 118.47 118.50
This is the exchange rate for converting the U.S. dollar into Japanese yen.
The bid price of 118.47 is the amount of yen that a dealer would give you if
you wanted to sell a dollar and buy yen. The ask price of 118.50 is the amount
of yen the dealer would charge you if you wanted to buy a dollar and sell yen.
The difference is the dealers profit, and naturally, youll be charged a com-
mission, too.
Note that with currency, youre a buyer and a seller at the same time. This
can increase the profit opportunities, but it can also increase your risk.
Day traders can trade currencies directly at current exchange rates, which
is known as trading in the spot market. They can also use currency exchange
traded funds (discussed earlier) or currency futures (discussed later in this
chapter) to profit from the changing prices of money.
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