What is Forex? • The Forex Market
Where is Trading Taking Place?
When is the Market open?
Who Participates in the Market?
What are Currency Pairs?
What are Quoting Conventions?
The 7 Most Common Currency Pairs • What is a Pip and How to Calculate it?
What is Margin?
What is Leverage?
How to calculate Profits and Losses
- Forex trading is the simultaneous purchase of one currency and the sale of another.
- The objective of FX trading is to exchange one currency for another in the expectation that the market price will change so that the currency bought will increase in value relative to the one sold.
- Size: The foreign exchange market, also known as the Forex market, or FX market, is the largest and most liquid financial market in the world.
- Liquidity: Its daily turnover is more than 2.5 trillion dollars.
- Forex trades are conducted directly between global counterparts, making the FX market an inter-bank, or “over the counter” (OTC) international market.
- Trading takes place 24 hours a day, 5 days a week starting on the night between Sunday night at 22:00 GMT and ending on Friday night at 22:00 GMT.
Central, commercial and investment banks have traditionally dominated the Forex market. But the share of other market participants is rapidly increasing. These participants include international money managers and brokers, multinational corporations, registered dealers, options and futures traders, as well as private investors.
- Currencies are always priced in pairs; the first currency is called the base currency or the Primary currency while the second currency is known as quote currency, payment currency or counter currency.
- As with all financial products, Forex quotes include a “bid” and “ask”.
- The “bid” is the price at which a market maker is willing to buy (clients sell).
- The “ask” is where the market maker will sell (clients buy) the currency pair.
- The difference between the Bid and Ask prices is referred to as the spread.
- Traders enjoy low spreads in the major currencies such as EUR/USD.
- 1. EUR/USD (Euro & US Dollar) known as the “Euro”
- 2. GBP/USD ( British Pound & US Dollar) normally called “Cable”
- 3. USD/JPY ( US Dollar & Japanese Yen) known by just the “Dollar Yen”
- 4. USD/CHF (US Dollar & Swiss Franc) known by just the “Swissy”
- 5. AUD/USD (Australian Dollar & US
Dollar) known by just the “Aussie Dollar”
- 6. USD/CAD (US Dollar & Canadian Dollar) known by just the “Dollar Canada”
- 7. USD/NZD (US Dollar & New Zeeland Dollar) known by as the “Kiwi”
- These are the second group of important currencies, not weighted against the USD.
- EUR/CHF } GBP/JPY
- JPY/CHF } Etc.
- A pip or “percentage in point” is the smallest denomination in the price of currencies. It is the fourth digit in all currency pair with the exception of the Japanese Yen (JPY) – where it is the second digit.
- A “tick” depicts to the smallest change, or increment in movement in any currency pair on the Forex market.
- For example: EUR/USD change from 1.4796 to 1.4795 is called one tick/pip is 0.0001.
- In a trade that is worth 10 Lots (i.e. 100,000 primary currency), every pip is worth 10 units of the secondary currency.
Example: I bought 100,000 EUR/USD at 1.3673. The price went up to 1.3773, an appreciation of 100 pips – I made 1000 USD.
- The Calculation: Every pip in a 10 Lot deal is worth $10. I made: 100*$10=$1000
- Size of the Position/10,000 = 1 pip
Margin are the securities deposited by traders that enable them to participate in the Forex market.
- In the event that your funds fall below margin requirements, the broker will close some or all open positions. This prevents your accounts from falling into a negative balance which means you cannot lose more than your initial investment.
- Leverage gives the trader the ability to multiply his margin in order to get a better return on his/her money.
- Some Brokers offer up to 1000 to 1 leverage, which means that a $1000 dollar margin deposit would enable a trader to buy or sell up to $1.000,000 worth of currencies.
- I have deposited $1000 USD, and I use 1:400 leverage on my money.
Question: What change in price will double my investment?
- Answer: 1000/400,000=0.25% (0.0025)
- If the price increases by 25 pips, I will make a profit of $1000 USD and double my money.
- I have deposited $1000 USD and and I use 1:200 leverage on my money.
- Question: What change in price will draw my margin down to zero?
- Answer: 1000/200,000=0.50% (0.0050)
- If the price decreases by 50 pips, my margin will draw down to zero.
- In this case, I won’t be able to loose more than my margin ($1000).
- When a trader buys a currency that later appreciates in value, the trader must sell the currency back in order to lock in the profit. An open trade or open position is one in which a trader has either bought/sold one currency pair and has not sold/bought back the equivalent amount to effectively close the position. Once a position is closed, the profits or losses can be calculated.
- If a trader sells 100,000 EUR/USD at 1.2340 and then buys 100,000 EUR/USD at 1.2760, his net position in EUR is zero (100,000100,000) however his USD is not.
The USD position is calculated as follows 100,000*1.2340 = $123,400 long and 100,000*1.2810= -$128,100 short.
- The profit or loss is always in the secondary currency. In this case the profits and losses are in USD. The example shows a profit of $4700.
- Stop-Loss Guarantee: We encourage all of our traders to use the Stop-Loss feature to protect themselves against extreme market volatility and enjoy a positive trading experience.
- Reliable 24 Hour Live Feed: The MetaTrader 4 platform is connected to the inter-bank currency market with no quoting delays or price deviations, or liquidity problems. We use the best feed, just like the major European banks, to make sure our quoting is both quick and reliable.
- No commissions: No clearing fees, no brokerage fees. Brokers are compensated for their services through something called the bid-ask spread.
- No middlemen: currency trading allows you to trade directly with the market responsible for the pricing on a particular currency pair.
- Margin: The margin requirement allows the investor to trade a larger amount of money with a relatively small deposit.
- Low transaction costs: The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions.
- A 24-hour market: There is no waiting for the opening bell – from Sunday evening to Friday afternoon EST, the Forex market never sleeps.
- No one can dominate the market: The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time.
- Tremendous Leverage: Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. brokers offer up to 400 to 1 leverage, which means that a $100 dollar margin deposit would enable a trader to buy or sell $400,000 worth of currencies.
- Extremely high Liquidity: Because the Forex Market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
- Free “Demo” Accounts, News, Charts, and Analysis: Brokers offers ‘demo’ accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for all traders who would like to practice their trading strategies with ‘play’ money before opening a live trading account and risking real money.