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 Posted: Tue Aug 15, 2006 9:55 am Post subject: FX Currency Trading / FX Forex Trading Online - Know More |
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Forex Trading – FX
Trading
Foreign
Exchange
This short introduction explains the basics of trading Forex online, a brief
explanation of the markets and the major benefits of trading Forex online. There are also two scenarios describing the
implications of trading in a bear as well as
bull market to better acquaint you with some of the
risks and opportunities in the largest and most
liquid market in the world.
As an additional
aid for those who are new to Forex, there is also a
glossary at the bottom of this text which explains
some of the terms used in connection with currency trading.
Overview
[url=http://www.forextrad
ing.com/articles/HowToTrade.aspx#G13%23G13]Foreign exchange[/url] ,
forex or just
Forex are all terms used to describe the trading of
the world's many currencies. The forex market is
the largest market in the world, with trades amounting to more than $1.5 trillion every day. This is more than one hundred
times the daily trading on the NYSE (New York Stock
Exchange) . Most forex trading is speculative
, with only a few percent of market activity representing governments' and companies' fundamental currency conversion
needs.
Unlike trading on the stock market, the forex market is not carried out by a central exchange, but on the
"interbank" market , which is thought of
as an OTC (over the counter ) market. Trading takes
place directly between the two counterparts necessary to make a trade, whether over the telephone or on electronic networks
all over the world. The main centres for trading are Sydney, Tokyo, London, Frankfurt and New York. This worldwide
distribution of trading centres means that the forex market is a 24-hour
market.
Trading Forex
A currency
trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is
called a cross (for example, the Euro/US Dollar, or
the GB Pound/Japanese Yen.). The most commonly traded currencies are the so-called "majors" - EURUSD, USDJPY,
USDCHF and GBPUSD.
The most important forex market is the spot market as it has the largest volume. The market is
called the spot market because trades are settled
"immediately" or on the spot. In practice this means within two banking
days.
Trading on Margin
Trading on
margin means that you can buy and sell assets that
represent more value than the capital in your account. Forex trading is usually done with relatively little margin since
currency exchange rate fluctuations tend to be less
than one or two percent on any given day. To take an example, a margin of 2.0% means you can trade up to $500,000 even though
you only have $10,000 in your account. In terms of
leverage this corresponds to 50:1, because 50 times
$10,000 is $500,000, or put another way, $10,000 is 2.0% of $500.000. Using this much leverage gives you the possibility to
make profits very quickly, but there is also a greater risk of incurring large losses and even being completely wiped out.
Therefore, it is inadvisable to maximise your leveraging as the risks can be very high. For more information on the trading
conditions at Saxo Bank, go to the Account Summary on your Client Station and open the section entitled "Trading
Conditions" found in the top right-hand corner of the Account
Summary.
Why trade
Forex?
- 24 hour
trading
One of the major advantages of trading forex is the opportunity to trade 24 hours a day from Sunday
evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a unique opportunity to react instantly to breaking news
that is affecting the markets.
- Superior liquidity
The forex market is so
liquid that there are always buyers and sellers to trade with. The
liquidity of this market, especially that of the
major currencies, helps ensure price stability and low
spreads . The liquidity comes mainly from large and
smaller banks that provide liquidity to investors, companies, institutions and other currency market
players.
- No commissions
The fact that forex is often traded without
commissions makes it very attractive as an investment opportunity for investors who want to deal on a frequent basis. Trading
the "majors" is also cheaper than trading other
crosss because of the high level of liquidity. For
more information on the trading conditions at Saxo Bank, go to the Account Summary on your Client Station and open the
section entitled "Trading Conditions" found in the top right-hand corner of the Account
Summary.
- 50:1 Leverage
With a minimum account of USD 10,000, for example,
you can trade up to USD 500,000. The USD 10,000 is posted on
margin as a guarantee for the future performance of
your position.
- Profit potential in falling markets
Since the market is
constantly moving, there are always trading opportunities, whether a currency is strengthening or weakening in relation to
another currency. When you trade currencies, they literally work against each other. If the
EURUSD declines, for example, it is because the
U.S. dollar gets stronger against the Euro and vice versa. So, if you think the EURUSD will decline (that is, that the Euro
will weaken versus the dollar), you would sell EUR now and then later you buy Euro back at a lower price and take your
profits. The opposite trading scenario would occur if the EURUSD
appreciates .
Important Forex Trading
Terms
- Spread
The
spread is the difference between the price that you
can sell currency at ( Bid ) and the price you can
buy currency at ( Ask ). The spread on majors is
usually 5 pips under normal market conditions. For more information on the trading conditions at Saxo Bank, go to the Account
Summary on your Client Station and open the section entitled "Trading Conditions" found in the top right-hand
corner of the Account Summary.
- Pips
A pip is the smallest unit by which a
cross price quote changes. When trading forex you will often hear that there is a 5-pip
spread when you trade the majors. This spread is
revealed when you compare the bid and the ask price, for example
EURUSD is quoted at a bid price of 0.9875 and an
ask price of 0.9880. The difference is USD 0.0005, which is equal to 5 "pips". On a contract or position, the value
of a pip can easily be calculated. You know that the EURUSD is quoted with four decimals, so all you have to do is the
cancel-out the four zeros on the amount you trade and you will have one pip. Thus, on a EURUSD 100,000 contract, one pip is
USD 10. On a USDJPY 100,000 contract, one pip is equal to 1000 yen, because USDJPY is quoted with only two
decimals.
Trading Scenario - Trading Rising
Prices
If you believe that the Euro will strengthen against the dollar you'll want
to buy Euro now and sell it back later at a higher price.
<table cellpadding="3"><tr><td
valign="top">You buy Euro</td><td
valign="top">We quote <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G12%23G12">EURUSD</A> at <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G5%23G5">Bid</A> 0.9875 and <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G2%23G2">Ask</A> 0.9880, which means that you
can sell 1 Euro for 0.9875 USD or buy 1 Euro for 0.9880 USD. In this example you buy Euro 100,000, at the quote price of
0.9880 (ask price) per Euro.</td></tr><tr><td
valign="top">The market turns</td><td
valign="top">Later the market turns in favour of the Euro and the <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G12%23G12">EURUSD</A> is now quoted at Bid
0.9894 and Ask 0.9899.</td></tr><tr><td
valign="top">Now you want to sell your Euro and get the profit
</td><td valign="top">You sell Euro at a <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G5%23G5">Bid</A> price of
0.9894.</td></tr><tr><td valign="top">The profit is
calculated as follows: </td><td valign="top">Sell price-buy price
x size of trade (0.9894 minus 0.9880) multiplied by 100.000 = $140 Profit (Note that the profit or loss is always expressed
in the <A HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G27%23G27">secondary currency</A>
)</td></tr></table>
Trading Scenario -
Trading Falling Prices
If, on the other hand, you believe that the Euro will weaken
against the dollar, you'll want to sell EURUSD.<table cellpadding="3"><tr><td
valign="top">You sell Euro</td><td
valign="top">We quote <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G9%23G9">EURUSD</A> at a <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G5%23G5">Bid</A> price of 0.9875 and <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G2%23G2">Ask</A> price of 0.9880 and you decide
to sellEuro 100,000 at a <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G5%23G5">Bid</A> price of
0.9875.</td></tr><tr><td valign="top">The market
moves in your favour</td><td valign="top">The Euro weakens
against the dollar and the <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G9%23G9">EURUSD</A> is now quoted at bid 0.9744
and ask 0.9749.</td></tr><tr><td valign="top">Now you
buy back your Euro</td><td valign="top">You buy EUR at an <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#G2%23G2">ask</A> price of
0.9749.</td></tr><tr><td valign="top">Your
Profit/loss is then</td><td valign="top">Sell price-buy price x
size of trade (0.9875 minus 0.9749) multiplied by 100.000 = $ 1260
Profit</td></tr></table>
Remember that trading EUR 100,000 as we have done in our
examples, does not mean that you have to put up Euro 100,000 yourself. It means that you have to deposit 2.0% of Euro
100,000, which is Euro 2,000 on margin as a guarantee for the future performance of your
position.
Further Reading
To see
how you can trade the forex market and benefit from our toolbox of information and live quotes, please proceed to our Forex
Quick Start found under the Trading menu on the toolbar, under Forex.
Glossary
<table
cellpadding="3"><tr><td
valign="top">Appreciation</td>
<td
valign="top">Anincrease in the value of a currency.
</td></tr><tr><td
valign="top">Ask</td><td
valign="top">Theprice at which you can buy. Traders also speak of an ask price,the price
requested. This usually indicates the lowest price aseller will accept.
</td></tr><tr><td valign="top">Basecurrency
</td><td valign="top">Thecurrency that the investor buys or sells
(i.e. EUR in EURUSD). <A HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Bear</td><td
valign="top">Someonewho believes prices are heading down. A bear market is one inwhich there
is a sustained fall in prices and which does not looklike it will recover quickly. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Bid</td><td
valign="top">Theprice at which you can sell. Traders also speak of a bid price,the price
offered. This usually indicates the top price apurchaser will pay. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Bid/Ask</td><td
valign="top">TheBid rate is the rate at which you sell. The Ask (or offer) rate isthe rate
at which you can buy. <A HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Bull</td><td
valign="top">Someonewho is optimistic about the market. A bull market is characterisedby
enthusiastic and sustained buying. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">cross</td><td
valign="top">Whentrading currencies, the investor buys one currency againstanother. These
two currencies form the cross: for example, EURUSD.<A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">Crossrate
</td><td valign="top">Anexchange rate that is calculated from two
other exchange rates. <A HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Depreciation/decline</td><td
valign="top">Afall in the value of a currency. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">Exchangerate
</td><td valign="top">Whatone currency is worth in terms of
another, for example the $Amight be worth 58 US cents or 70 yen. Currencies traded freely onforeign-exchange markets have a
spot rate (applying to tradessettled 'spot', ie, two working days hence) and a forward rate.Countries can determine their
exchange rates in a variety of ways:a floating exchange rate system where the currency finds its ownlevel in the market; a
crawling or flexible peg system which is acombination of an officially fixed rate and frequent smalladjustments which in
theory work against a build-up of speculationabout a revaluation or devaluation; a fixed exchange-rate systemwhere the value
of the currency is set by the government and/orthe central bank. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">EURUSD</td><td
valign="top">Meansthat you trade EUR against dollars. If you buy Euro you pay indollars and
if you sell Euro you receive dollars. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">FX,Forex, Foreign
Exchange </td><td valign="top">Allnames for the transaction of
one currency for another, e.g. youbuy £100.00 with $150.25 or sell $150.25 for £100.00.<A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Interbank</td><td
valign="top">Short-term(often overnight) borrowing and lending between banks, as
distinctfrom banks' business with their corporate clients or otherfinancial institutions. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">Interestrate
differential </td><td valign="top">Theyield spread between two
otherwise comparable debt instrumentsdenominated in different currencies. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">Leverage(gearing)
</td><td valign="top">Inthis case leverage means that the
investor only funds part of theamount traded. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Long</td><td
valign="top">Tobuy. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">Longposition
</td><td valign="top">Aposition that increases its value if
market prices increase. <A HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">Liquid(-ity)
</td><td valign="top">Thecapacity to be converted easily and with
minimum loss into cash.Ultra-short-dated treasury notes are an example of a liquidinvestment. A liquid market is one in which
there is enoughactivity to satisfy both buyers and sellers. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Margin</td><td
valign="top">Theinitial amount or deposit required when entering into a position.Margin is a
guarantee for future performance. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">NYSE</td><td
valign="top">Acomputerised system providing brokers with the prices of sharesand securities
traded on the New York stock exchange and over thecounter. The quotes are published in real-time. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">Openposition
</td><td valign="top">Aposition in a currency that has not yet
been offset. For example,if you have bought 100,000 USDJPY, you have an open position inUSDJPY until you offset it by selling
100,000 USDJPY. <A HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">"Overthe
counter" </td><td valign="top">Whentrading takes place
directly between two parties, rather than onan exchange. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Pips</td><td
valign="top">Apip is the smallest unit by which a cross price quote changes. Soif EURUSD bid
is now quoted at 0.9767 and it moves up 2 pips, itwill now be quoted at 0.9769. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Position</td><td
valign="top">Money-market,futures, foreign-exchange and sharemarket traders talk of
'takinga position' which simply means buying or selling one currencycross. 'Position' can also refer to a
trader'scash/securities/currencies balance, whether he or she is short ofcash, has money to lend, is overbought or oversold
in a currency,etc. <A HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Risk</td><td
valign="top">Tryingto control outcomes to a known or predictable range of gains orlosses.
Risk management involves a set of steps which begin with asound understanding of one's business and the exposures or
risksthat have to be covered to protect the value of that business.Then an assessment should be made of the types of
variables thatcan affect the business and how best to protect against unwelcomeoutcomes. Consideration must also be given to
the preferred riskprofile - whether one is risk- averse or fairly aggressive inapproach. This also involves deciding which
instruments to use tomanage risk, and whether a natural hedge exists that can be used.Once undertaken, a risk-management
strategy should be continuallyassessed for effectiveness and cost. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">Secondarycurrency
(variable currency or counter currency) </td><td
valign="top">Thecurrency that the investor trades the base currency against (i.e.USD in
EURUSD). <A HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">Shortposition
</td><td valign="top">Aposition that benefits from a decline in
market prices. <A HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Short</td><td
valign="top">Tosell. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Speculative</td><td
valign="top">Buyingand selling in the hope of making a profit, rather than doing sofor some
fundamental business-related need. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Spot</td><td
valign="top">ASpot rate is the current market price of an asset. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td valign="top">Spotmarket
</td><td valign="top">Thepart of the market calling for spot
settlement of transactions.The precise meaning of 'spot' will depend on local custom for acommodity, security or currency.
In the UK, US and Australianforeign-exchange markets, 'spot' means delivery two working dayshence. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr><tr><td
valign="top">Spread</td><td
valign="top">Thedifference between the bid and the ask rate. <A
HREF="http://www.forextrading.com/articles/HowToTrade.aspx#top%23top"></A>
</td></tr></table>
<table cellpadding="3"><tr><td
valign="top"><B>Today'sForex News</B></td><td
valign="top"></td></tr><tr><td
valign="top"><A HREF="http://www.forbes.com/breakingnews/">ForbesBreaking
News</A> </td><td valign="top"><A
HREF="http://www.bloomberg.com/news/index.html">BloombergNews</A>
</td></tr><tr><td valign="top"><A
HREF="http://biz.yahoo.com/n/z/z0006.html">YahooCurrency News</A> </td><td
valign="top"><A HREF="http://www.nni.nikkei.co.jp/">NikkeiNews</A>
</td></tr><tr><td valign="top"><A
HREF="http://news.google.com/news/en/us/business.html">GoogleBusiness News</A>
</td><td valign="top"><A
HREF="http://home.kyodo.co.jp/">KyodoNews</A> </td></tr><tr><td
valign="top"><A HREF="http://www.reuters.com/finance.jhtml">ReutersFinancial
News</A> </td><td
valign="top"></td></tr></table>
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