Forex vs.Equities and Futures
The Forex market is a continuous 24-hour endeavor form its open at 2pm Sunday afternoon New York time with the Sydney-Auckland market until its close at 5pm Friday in New York. FX trading follows the day around the world: Tokyo's open at 9pm follows Sydney, London begins at 2am and finally New York takes over at 8am. The seamless 24 hour nature of the FX market gives the trader the unique experience of reacting to news and worldwide developments instantaneously, participating in real time in the largest trading market in the world.
Unlike the equity market, there is no restriction on short selling. Profit potential exists in the currency market regardless of whether a trader is long or short, or which way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. This means a trader has an equal potential to profit in a rising, or falling market.
The large Forex dealers usually do not charge commission or transaction fees to trade spot currencies exchange online or over the phone. In the equity market traders must pay a spread and a commission. The over-the counter structure of the forex market eliminates exchange and clearing fees, which in turn lowers transaction costs. Costs are further reduced by the efficiencies created by a purely electronic market place that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen. Because the currency market offers round-the-clock liquidity, traders receive tight, competitive spreads both intra-day and night. Equity traders are more vulnerable to liquidity risk and typically receive wider dealing spreads, especially during after hours trading.
Forex allows greater leverage than the equities, futures or options market. Forex traders can choose up to 1:500 leverage. Leverage is a double-edged sword. Without proper risk management this high degree of leverage can lead to large losses as well as gains.
The spot Forex market is a $2.0 trillion daily market, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. If you compare this to the $30 billion per day futures market it becomes clear that the futures markets provide only limited liquidity. The market is always liquid, meaning positions can be liquidated and stop orders executed without slippage.
More Reasons to Like Forex
No Middlemen
Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees. Spot currency trading does away with the middlemen and allows clients to interact directly with the market-maker responsible for the pricing on a particular currency pair. Forex traders get quicker access and cheaper costs.
Buy/Sell programs do not control the market
How many times have you heard that "fund A" was selling "X" or buying "Z"? Rumor had it that the funds were taking profits because of the end of the financial year or because today is "triple witching day", all as an explanation of why this stock is up or the market in general is down or positive on the session. The stock market is very susceptible to large fund buying and selling, and it's not uncommon for a fund to run a particular issue for a few days. In spot currency trading, the liquidity of the Forex market makes the likelihood of any one fund or bank to control a particular currency very slim. Banks, hedge funds, governments, retail currency conversion houses and large net-worth individuals are just some of the participates in the spot currency markets where the liquidity is unprecedented.
Analysts and brokerage firms are less likely to influence the market
Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as "buy" when the stock was rapidly declining? It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it. IPO's are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear. Foreign exchange, as the prime market, generates billions in revenue for the world's banks and is a necessity of the global markets. Analysts in foreign exchange don't drive the deal flow, they just analyze the forex market.
8,000 stocks versus 4 major currency pairs
There are approximately 4,500 stocks listed on the New York Stock exchange. Another 3,500 are listed on the NASDAQ. Which one will you trade? Got the time to stay on top of so many companies? In spot currency trading, you have 4 major markets, 24 hours a day 5.5 days a week. Concentrate on the majors and find your trade.
Margin and Leverage
Additionally, Forex trading with us is done on a margin system, essentially using a free short-term credit allowance used to purchase an amount of currency that greatly exceeds the traders account value
Understanding the Margin System
Trading currencies on margin lets you increase your buying power. Here's a simplified example: If you have $2,000 cash in a margin account that allows 1:100 leverage, you could purchase up to $200,000 worth of currency-because you only have to post 1% of the purchase price as collateral. Another way of saying this is that you have $200,000 in buying power.
You are probably wondering how a small investor can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep. Sounds too good to be true? Well this is how forex trading using leverage works.
For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 you can trade up to $500,000 of Forex.
In the example above, it is used a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a depost on the position.
What is a Margin Call?
In the event that money in your account falls below margin requirements (usable margin), your account will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.
Example #1
Let’s say you open a regular Forex account with $2,000. You open 1 lot of the USD/JPY, with a margin requirement of $1000. Usable Margin is the money available to open new positions or sustain trading losses. Since you started with $2,000, your usable margin is $2,000. But when you opened 1 lot, which requires a margin requirement of $1,000, your usable margin is now $1,000.
If your losses exceed your usable margin of $1,000 you will get a margin call.
Example #2
Let’s say you open a regular Forex account with $10,000. You open 1 lot of the USD/JPY, with a margin requirement is $1000. Remember, usable margin is the money you have available to open new positions or sustain trading losses. So prior to opening 1 lot, you have a usable margin of $10,000. After you open the trade, you now have $9,000 usable margain and $1,000 of used margin.
If your losses exceed your usable margin of $9,000, you will get a margin call.
Make sure you know the difference between usable margin and used margin.
If the equity (the value of your account) falls below your usable margin due to trading losses, you will either have to deposit more money or the system will close your position to limit your risk. As a result, you can never lose more than you deposit.
Leverage Ratio and Margin Percentage
The simple relationship between the two terms are:
Leverage = 100 / Margin Percent
Margin Percent = 100 / Leverage
Leverage is conventionally displayed as a ratio, such 1:100
Margin Trading: Stocks vs Forex
The word "margin" means something very different in forex than it does in stocks.
With stocks, trading on margin means that a trader can borrow up to 50% of a stock's value to buy that stock. This can be a costly move because the investor must pay interest to the brokerage firm on the amount borrowed. This is not the case in forex trading.
For example: at $400/share, 100 shares of Google are valued at $40,000 ($400 x 100 shares). To trade this stock on margin, the money required for the trade is 50%, or $20,000. The remaining $20,000 is borrowed and interest must be paid on that amount. Margin interest is different from broker to broker, but a good rule of thumb is typically Prime plus 1-3% or more.
In forex, margin is the minimum required balance to place a trade. When you open a forex trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, is typically 1% of the value of the position.
For example: if you want to purchase $100,000 of USD/JPY at 1:100 leverage, the money required is 1%, or $1000. The other $99,000 is collateralized with your remaining account balance. You pay no interest.
It is very important to remember that leverage magnifies your profits AND your losses. You should monitor your account balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.
However, leverage is an exceptionally good tool that can be utilized to increase your buying power and return on capital, as long as you have a solid risk management plan in place.
Trading Rules
Following rules define the operation conditions in FOREX and CFD markets, which Company provides to physical and juridical persons via Internet or a telephone line. These rules and conditions make clear how to open, close trading positions and place, remove or change orders, and how these orders are executed by the Company on valid trading tools. This section includes the basic moments (most important) of trading character mentioned in the Agreement, and also some other not less important information. At the same time we strongly recommend you read the full version of the Agreement.
1. The deal (opening or closing a position) is executed at the "BID" / "ASK" prices offered to the Client. The Client chooses desirable operation and makes a request for the deal confirmation by the Company. The deal is executed at the prices the Client can see on the screen. During the confirmation the price may be changed, and the Company has right to offer the Client a new price. Thus the Client has right to refuse a suggested price.
2. Orders: Stop Loss, Take Profit, Buy Limit, Buy Stop, Sell Limit, Sell Stop on currency pairs and CFD contracts are executed at the declared by the Client prices on the first market price touch. The Company reserves the right not to execute the order, or to change the opening (closing) price of the deal in case of technical failure of the trading platform, reflected financial tools quotes feed, and also in case of other technical failures. Under certain trading conditions it may be impossible to execute orders (Stop Loss, Take Profit, Buy Limit, Buy Stop, Sell Limit, Sell Stop) on currency pairs and CFD contracts at the declared price. In this case the Company has the right to execute the order or change the opening (closing) price of the deal at a first market price. This may occur, for example, at times of rapid price movement if the price rises or falls in one trading session to such an extent that under the rules of the relevant exchange trading is suspended or restricted. Or this may occur in the trading session start moments. So as a result, placing a stop-loss order will not necessarily limit your losses to the intended amounts, because market conditions may make it impossible to execute such an order at the stipulated price.
3. Normal basic spreads on trading tools are specified in "Contract Specification". However, the Company has the right to increase spreads on currency pairs and CFD contracts. In particular, spreads on basic currency pairs EUR/USD, USD/CHF, GBP/USD, USD/JPY can be increased under certain trading conditions up to 5 points on EUR/USD, up to 7 points on USD/CHF, up to 6 points on GBP/USD and up to 5 points on USD/JPY.
4. The minimum level for placing SL, TP and Limit Orders from a market price on currency pairs is 10 points - for currency pairs with spread less than 10 points, and is equaled spread - for currency pairs with spread more than 10 points. The Client has no right to change or remove SL, TP and Limit Orders if the price has reached the level of the order execution.
5. At Margin level less than 10 percent the Company has right to begin closing positions starting from most unprofitable, while Margin level = 5 % or less all positions are getting closed forcedly in the automatic mode at current price.
6. The Client takes full responsibility for giving of directions for opening, closing, changes and removal of positions or orders on the phone line +74957889675 through the operators of the Company. All operations in this case are executed under the responsibility of the Client. The Client agrees and realizes, that all conversations between the Client and the Company can be written down on magnetic, electronic and other carriers. The Client further agrees to use these records as the facts in case of any questions between the Company and the Client.
7. Trading operations using additional functions of the client trading terminal, such as Trailing Stop or Expert Adviser are executed completely under the Client responsibility, as they depend directly on the client trading terminal and cannot be supervised by the Server of the Company.
Please pay attention to the following:
1. Charts in Metatrader 4 system display only BID price of a quote. Therefore, to get ASK price for the certain moment on the chart, it is necessary to add a spread. This moment is most important at orders execution.
2. If the trading account has an open position with Stop Loss order and there is no free margin for opening another one, and at the same time a new postponed order is placed at the same price as Stop Loss (a so-called "stop with reverse" situation), so theoretically two orders should be executed simultaneously. However, the Server first of all executes the postponed orders and in this situation the postponed order can be automatically removed due to insufficient margin requirement for opening a new position. Be attentive!
Forex History
Forex Trading History
The Bretton Woods Agreement
In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency. Friedman, he had perceived sterling to be priced too high against the dollar, wanted to sell the currency, then later buy it back to repay the bank after the currency declined, thus pocketing a quick profit. The bank's refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed national currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold.
The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the world currencies Prior to the Agreement, the gold exchange standard--prevailing between 1876 and World War I--dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation.
But the gold exchange standard didn't lack faults. As an economy strengthened, it would import heavily from abroad until it ran down its gold reserves required to back its money. As a result, money supply would shrink, interest rates rose and economic activity slowed to the extent of recession. Ultimately, prices of goods had hit bottom, appearing attractive to other nations, which would rush into buying sprees that injected the economy with gold until it increased its money supply, and drive down interest rates and recreate wealth into the economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold.
After the Wars, the Bretton Woods Agreement was founded, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantage and were only allowed to do so for devaluations of less than 10%. Into the 1950s, the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction. That destabilized foreign exchange rates as set up in Bretton Woods.
The Agreement was finally abandoned in 1971, and the US dollar would no longer be convertible into gold. By 1973, currencies of major industrialized nations became more freely floating, controlled mainly by the forces of supply and demand which acted in the foreign exchange market. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s, giving rise to new financial instruments, market deregulation and trade liberalization.
In the 1980s, cross-border capital movements accelerated with the advent of computers and technology, extending market continuum through Asian, European and American time zones. Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades later.
The Euromarket
A major catalyst to the acceleration of foreign exchange trading was the rapid development of the euro-dollar market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia's oil revenue-- all in dollars -- was deposited outside the US in fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports.
London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London's convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euromarket.
Forex Basics
Forex Basics
Foreign Exchange
Foreign exchange (Forex or FX) is the largest financial market in the world with a daily turnover of over $2.0 trillion.
What is traded on the Foreign Exchange?
The answer is money. Forex trading is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are traded in pairs; for example the Euro dollar and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).
This kind of trading is often very confusing to people because they are not buying anything physical. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the country's economy.
Unlike other financial markets, the foreign exchange market has no physical location and no central exchange. The Forex market operates 24 hours a day through an electronic network of banks, corporations and individual traders. Forex trading begins every day in Sydney, then moves to Tokyo, followed by London and then New York. The major market makers, or dealers, consist of the commercial and investment banks, the exchange traded futures, and registered futures commission merchants. Our dealing desk is open 24-hours a day from Sunday 17:00 EST to Friday 17:00 EST.
Foreign Exchange Prices
Foreign exchange markets and prices are mainly influenced by international trade flows and investment flows. The FX markets are also influenced, but to a lesser extent, by the same factors that influence the equity and bond markets: economic and political conditions especially interest rates, inflation, and political instability. Those factors usually have only a short-term impact, which makes Forex attractive as it offers some of the diversification necessary to protect against adverse movements in the equity and bond markets.
Currencies are usually quoted to four decimal places, such as the Euro/US Dollar trading at 1.2400/1.2403, with the last decimal place referred to as a point or "pip". A pip for most currencies is 0.0001 of an exchange rate; the one exception is the USD/JPY quote in which each pip is equal to 0.01.
How an FX Trade Works?
In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.
Example of How FX Trade Works
Trader's Action Euros US Dollars
A trader purchases 10,000 euros in the beginning of 2001 when the EUR/USD rate was .9600. +10,000 -9,600
In May of 2003 the trader exchanges his 10,000 euro back into US dollar at the market rate of 1.1800. -10,000 +11,800
In this example, the trader earned a gross profit of $2,200. 0 +2,200
Quoting Conventions
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the "basis" for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.
EUR/USD
In this example euro is the base currency and thus the "basis" for the buy/sell.
If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the "basis" for the buy/sell.
If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
GBP/USD
In this example the GBP is the base currency and thus the "basis" for the buy/sell.
If you think the British economy will continue to be the leading economy among the G7 nations in terms of growth, thus buying the pound, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/CHF
In this example the USD is the base currency and thus the "basis" for the buy/sell.
If you think the US dollar is undervalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
Buying/Selling
First, you should determine whether you want to buy or sell.
If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader's talk, this is called "going long" or taking a "long position". Just remember: Long = Buy = Ask.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". Short = Sell = Bid.
» How to calculate Profit and Loss
Bid/Ask Spread
All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.
The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price in which you the trader will sell.
The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price in which you the trader will buy.
The difference between the bid and the ask price is popularly know as the Spread.
Let's take a look at an example taken from a trading software:
Price Quote
On this EUR/USD quote, the bid price is 1.2293 and the ask price is 1.2296. Look at how this broker makes it so easy for you to trade away your money. If you want to sell EUR, you click "Sell" and you will sell Euros at 1.2293. If you want to buy EUR, you click "Buy" and you will buy Euros at 1.2296.
I don't have enough money to buy $10,000 EUR. Can I still trade?
Yes, You can with margin trading! Margin trading is simply the term used for trading with borrowed capital. This is how you're able to open $10,000 or $100,000 positions with $50 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.
For Example:
You believe that signals in the market are indicating that the British Pound will go up against the US Dollar. You open 1 lot ($100,000) for buying the Pound with a 1% margin at the price of 1.5000 and wait for the exchange rate to climb. This means you now control $100,000 worth of British Pound with $1,000. Your predictions come true and you decide to sell. You close the position at 1.5050. You earn 50 pips or about $500. (A pip is the smallest price movement available in a currency). So for an initial capital investment of $1,000, you have made 50% return. Return equals your $500 profit divided by your $1,000 you risked to trade.
» More information on Margin Trading
Rollover/Interest Rate
For positions open at 5pm EST, there is a daily rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market. If you do not want to earn or pay interest on your positions, simply make sure it is closed at 5pm EST, the established end of the market day.
Since every currency trade involves borrowing one currency to buy another, interest rollover charges are an inherent part of FX trading. Interest is paid on the currency that is borrowed, and earned on the one that is purchased. If a client is buying a currency with a higher interest rate than the one he/she is borrowing, the net differential will be positive and the client will earn funds as a result.
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» See Dealing Details
Analysis of Foreign Exchange Markets
Foreign exchange traders base their decisions on either technical analysis and fundamental analysis.
Technical traders use charts, trend lines, support and resistance levels, mathematical models and other means to identify opportunities and drive trading decisions. Click here for more information on Technical Analysis
Fundamental traders identify trading opportunities by analyzing economic information.Click here for more information on Fundamental Analysis
24-Hour Access to the World
When you choose to trade currencies, you’re choosing greater freedom in your trading. With the ability to trade forex 24 hours a day, 5.5 days a week with extreme liquidity, you participate when you want to, not when the market dictates.
The market is able to stay open 24 hours a day, 5.5 days a week, because trading begins with the open in Australia, and flows through the open and close of the major financial trading centers in Asia, Europe, the United States and back again to Australia.
The daily foreign currency trading volume is determined by which markets are open at any point in time. When international market open times overlap, such as when the U.S. and British market are open simultaneously, greater trading volume is seen, resulting in peak trading.
