In the forex market currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, the trader must sell the currency back in order to lock in the profit. An open trade or 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.
Quoting Conventions:
The first currency in the pair is referred to as the base currency, and the second currency is the counter or quote currency. The U.S Dollar, as the world’s dominant currency, is usually considered the base currency for quotes, and includes USD/JPY, USD/CHF, and USD/CAD. This means that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The exceptions are the Euro, Great Britain pound, and Australian dollar. These currencies are quoted as dollars per foreign currency.
Bid and Ask:
As with all financial products, FX quotes include a "bid" and "ask". The bid is the price at which a market maker is willing to buy the base currency in exchange for the counter currency. The ask is the price at which a market maker will sell the base currency in exchange for the counter currency. The difference between the bid and the ask price is referred to as the spread.
Concept of Point or Pip:
In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a point or a pip. In forex, like any traded instrument, there is an immediate cost in establishing a position. For example, USD/JPY may bid at 131.40 and ask at 131.45, this five-pip spread defines the trader’s cost, which can be recovered with a favourable currency move in the market.
Margin:
The margin requirement allows traders to hold a position much larger than the account value.The trading platform performs an automatic pre-deal check for margin availability, and will only execute the deal if the client has sufficient margin funds in his or her account. The Forex Broker's system also calculates the funds needed for current positions and displays this information to clients in real time. In the event that funds in the account fall below margin requirements, the For Ex Brokers will close all open positions. This prevents clients' accounts from falling below the available equity even in a highly volatile, fast moving market.
Rollover:
In the spot forex market trades must be settled in two business days. For example, if a trader sells 100,000 euros on Tuesday, the trader must deliver 100,000 euros on Thursday, unless the position is rolled over. As a service to traders, Forex Brokers automatically roll over all open positions i.e. swaps the trade forward to the next settlement date (two business days) at 5:00 PM New York time. The swap rates are determined at the Inter bank level and are tradable instruments. In any spot rollover transaction there is a difference in interest rates between the two currencies that will be reflected in the overnight loan. If the trader is long the currency with the higher interest rate in the pair, the trader should gain on the spot rollover through the premium relationship of that currency relative to the short currency. The amount of the gain is determined by the interest rate differential between the two currencies, and fluctuates day to day with the movement of prices. For instance, on any given day, the rollover can be $2 per lot for USD/JPY and $15 for GBP/JPY. Rollover fees are usually shown in dollars, and are posted in Forex Brokerage Accounts every day, usually by 3:00 pm New York time. For day traders that never hold a position overnight, rollover will not affect trading.
What Every Currency Trader Should Know:
The forex market is one of the most popular markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available. The Forex Brokers usually allow positions to be leveraged up to 100:1. Without proper risk management, this high degree of leverage can lead to enormous swings between profit and loss. Knowing that even seasoned traders suffer losses, speculation in the forex market should only be conducted with risk capital funds that if lost will not significantly affect one's personal financial well being.
How can I participate in the Spot Currency market as a Trader?
From 1971 until recent years the virtual owners of this market were the banks, multinational corporations and large brokerage firms. If an individual wanted to invest in this market, he could invest with a bank with a one million dollar cash deposit backed by the requirement of a 5-10 million dollar net worth. A slightly better option was provided by the brokerage firms, which asked a lower minimum deposit on average of a quarter million dollars.
But now the forex market has been opened up to Individual investors. Unlike the huge sums of money previously required by the banks and brokerage firms, comparatively far lower margin requirements are finally available that now allows virtually any individual to trade along with the professionals and institutions. In addition, individual investors have the opportunity to take advantage of the growing boom in computer and communication technologies that has made this market accessible in ways previously exclusive only to large players. Foreign Exchange Trading Provides an Alternative Investment Vehicle to Equity or Debt Instruments!
Currency trading gives you, the investor, and the opportunity to not be affected by a bear market. Currency is very different from a typical investment portfolio where one might purchase stocks, bonds or real estate. In these instances you are looking for opportunities to buy at a period low and hold, hoping that the price will increase and then sell at a higher price. In effect the typical investor will simply wait for results and hope they are favorable. In currency trading you have more opportunity to control your destiny. You will control your own money and realize with your trading you are not dependent on a market direction.
For example, in your investment decisions in Forex you are able to deal with the dollar on both sides of the market. Consider a Sterling/US currency scenario. When you buy Sterling, it means that you sell USD. The same holds true when you do the opposite. Selling Sterling simply means that you bought US dollars. In other words you can start by selling a currency without first buying it. This ability to invest in both sides of the currencies gives an investor the opportunity to use the two-way market approach as an exact lucrative alternative to the scenario described above with "wait and see" investments.
Currency trading gives you instant liquidity and a flexible investment strategy. Trading currency online expedites the process and increases your opportunity for successful trades. As your knowledge of the market increases, so will your sophistication of trading and opportunity for incredible profits. A Bear Market will no longer be a fact to consider.
How fair is the Forex market?
The Forex market is so large and is composed of so many participants that no one player, not even a large government, can completely control the long-term direction of the market. So, many experts have called Forex the “most level playing field” on earth.
How often does a person have to trade?
The beauty of self-trading Forex is that a person can trade as occasional or often as they want. They can learn to trade longer-term strategies that may require checking the market as little as once or twice a week. Or, they can learn to trade shorter-term methods that may require watching the market a few hours a day.
Do you need a lot of money to trade currencies in the forex market?
No. The minimum deposit required is $5,000. Customers are allowed to execute margin trades at up to 50:1 leverage. This means that investors can execute trades up to $100,000 with an initial margin requirement of $2000. However, it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great. A more pragmatic margin trade for someone new to the Forex markets would be 5:1 or even 10:1, but ultimately depends on the investor's appetite for risk.
What is Margin?
Margin is essentially collateral for a position. If the market moves against a customer's position, additional funds will be requested through a "margin call." If there are insufficient available funds, immediately the customer's open positions will be closed out.
What does it mean have a “long” or “short” position?
A long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. In this scenario, the investor benefits from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this scenario, the investor benefits from a declining market. However, it is important to remember that every Forex position requires an investor to go long in one currency and short the other.
How do I manage risk when I trade currencies?
The most common risk management tools in Forex trading are the limit order and the stop loss order. A limit order places restriction on the maximum price to be paid or the minimum price to be received. A stop loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses should the market move against an investor's position. The liquidity of the Forex market ensures that limit order and stop loss orders can be easily executed.
What kind of trading strategy should I use?
Currency traders make decisions using both technical factors and economic fundamentals. Technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities, whereas fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumor. The most dramatic price movements however, occur when unexpected events happen. The event can range from a Central Bank raising domestic interest rates to the outcome of a political election or even an act of war. Nonetheless, more often it is the expectation of an event that drives the market rather than the event itself.
How frequent do people trade currencies?
Market conditions dictate trading activity on any given day. As a reference, the average small to medium trader might trade as often as 10 times a day.
How long are positions maintained?
As a general rule, a position is kept open until one of the following occurs:
1) Realization of sufficient profits from a position;
2) The specified stop-loss is triggered;
3) Another position that has a better potential appears and you need these funds.
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