The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the Credit market. It’s no wonder that the Forex market has the trading volume of 5 trillion a day– all anyone needs to take part in the action is a computer with an internet connection.
The Forex market is open 24 hours a day, so that you can be right there trading whenever you hear a financial scoop. No need to bite your fingernails waiting for the opening bell. Unlike the stock market, a smaller market with tens of thousands of stocks to choose from, the Forex market revolves around more or less eight major currencies. A narrow choice means no room for confusion, so even though the market is huge, it’s quite easy to get a clear picture of what’s happening.The foreign exchange market is the largest financial market in the world with a daily turnover of just over $3 trillion! Now apart from being a really cool statistic, the sheer massive scope of the Forex market is also one of its biggest advantages. The enormous volume of daily trades makes it the most liquid market in the world, which basically means that under normal market conditions you can buy and sell currency as you please. You can never be in a jam for currency to buy or stuck with currency that you cannot unload.
The colossal size of the Forex market also makes sure that no one can corner the market. Even banks do not have enough pull to really control the market for a long period of time, which makes it a great place for the little guy to make a move. It doesn’t take a financial genius to figure out that the biggest attraction of any market, or any financial venture for that matter, is the opportunity for profit.
If you have been at all exposed to the world of Forex, you have probably heard the word “Leverage” being tossed around. But what exactly is “Leverage”?Leverage is a very important part of Forex trading, and it is critical that you know exactly how it works and how to use it. It is the term Forex traders use to refer to the ratio of invested amount relative to the trade’s actual value. Forex brokers usually provide their customers with the option to trade on borrowed capital, so that traders do not have to invest tens of thousands of dollars for the chance to make any real profit. When you trade at a leverage of 100:1 (or “100 to 1”), it means that for every $1 that you invest in the market, the broker invests $100 for you. As a result, you can control an amount of $50,000 by investing $500.
It probably will not surprise you when we say that with greater opportunity for profit comes greater risk. Just like slight fluctuations in currency rates can make you significant amounts of money, it can also cause you to lose your money very quickly. The higher the leverage, the larger the profit that you stand to make and the quicker you might lose your investment. A leverage of 500:1 can make you more money than a . leverage of 100:1, but it also puts your initial investment at more risk.If you trade with a leverage of 100:1, the market would have to move 100 pips against you for your position to be wiped out. On the other hand, if you trade with a leverage of 400:1, the market would only have to move .25 points against you for your position to be wiped out
Forex trading can be a risky business. This chapter will explain the usage of Stop Loss (“Stop”) and Limit (Sometimes called “Take Profit”) orders. These are used for hedging your risks and rewards, realizing your profits and minimizing your losses.Most Forex Brokers will automatically close out your trades at certain levels to prevent you from losing more than you have invested (called a Margin Call or “MC” on your account statement). If the rate on your open position drops below what is covered by your Used Margin (or “investment”), the position is automatically closed out. This means that the maximum amount you can lose on a trade is always limited to the initial investment of the trade.
Still, there is no reason why you should wait until you lose your entire investment to close the trade. By setting a Stop order you make sure that the value of your position does not drop below a certain level. This way you control the maximum amount that you are willing to lose on a trade, without having to monitor each trade around the clock.
Having some losing trades is inevitable for any trader. One of the most critical keys to successful trading is to limit losses on these losing trades, using Stops and controlling risk.Limit orders, sometimes called “Take Profit” or “T/P” are similar to stop loss orders, only referring to profits. Limit orders ensure that once your trade reaches a certain level of profit, it will be closed and the profit locked‐in.
- Ask: Price at which broker/dealer is willing to sell. Same as “Offer”.
- Balance: The value of your account not including unrealized gains or losses on open positions.
- Bid: Price at which broker/dealer is willing to buy.
- Bid/Ask Spread (or “Spread”): The distance, usually in pips, between the Bid and Ask price. A tighter spread is better for the trader.
- Cost of Carry (also “Interest” or “Premium”): The cost, often quoted in terms of dollars or pips per day, of holding an open position.
- Currency Futures: Futures contracts traded on an exchange, most typically the Chicago Mercantile Exchange (“CME”). Always quoted in terms of the currency value with respect to the US Dollar. Parameters of the futures contract are standardized by the exchange.
- Drawdown: The magnitude of a decline in account value, either in percentage or dollar terms, as measured from peak to subsequent trough. For example, if a trader’s account increased in value from $10,000 to $20,000, then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown of $5,000 (incurred when the account declined from $20,000 to $15,000) even though that trader’s account was never in a loss position from inception.
- Equity: This represents the current market value of your account. Equity = Balance + (unrealized profit/loss on open positions).
- Forex: Short for “Foreign Exchange”. Refers generally to the Foreign Exchange trading industry and/or to the currencies themselves.
- Leverage: The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade. For example, if the notional amount traded (also referred to as “lot size” or “contract value”) is $100,000 dollars and the required margin is $2,000, the trader can trade with 50 times leverage ($100,000/$2,000).
- Limit: Also called “Take Profit” or “T/P”. An order to buy at a specified price when the market moves down to that price, or to sell at a specified price when the market moves up to that price.
- Liquidity: A function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.
- Margin: The amount of funds required in a client’s account in order to open a position or to maintain an open position. For example, 1% margin means that $1,000 of funds on deposit is required for a $100,000 position. Margin Call: A requirement by the broker to deposit more funds in order to maintain an open position.
- Sometimes a “margin call” means that the position which does not have sufficient funds on deposit will simply be closed out by the broker. This procedure allows the client to avoid further losses or a debit account balance.
- Market Order: An order to buy at the current Ask price.
- Offer: Price at which broker/dealer is willing to sell. Same as “Ask”.
- Pip: The smallest price increment in a currency. Often referred to as “ticks” in the futures markets. For example, in EURUSD, a move from
- Premium (also “Swap” or “Cost of Carry”): The cost, often quoted in terms of dollars or pips per day, of holding an open position.
- Rollover: Is the changing of futures when they expire to the new contract.
- Spot Foreign Exchange: Often referred to as the “interbank” market. Refers to currencies traded between two counterparties, often major banks. Spot Foreign Exchange is generally traded on margin and is the primary market that this website is focused on. Generally more liquid and widely traded than currency futures, particularly by institutions and professional money managers.
- Stop: Also called “Stop Loss” or “S/L”. An order to buy at the market only when the market moves up to a specific price, or to sell at the market only when the market moves down to a specific price.
- Technical Analysis: Analysis applied to the price action of the market to develop trading decisions, irrespective of fundamental factors.
- Tick: The smallest price increment in a futures or CFD price. Often referred to as a “pip” in the currency markets. For example, in Down Jones Industrials, a move from 8845 to 8846 is one tick. In S&P 500, a move from 902.50 to 902.51 is one tick.
- Usable Margin: The amount in your account available as margin for new positions. Usable Margin = Equity ‐ Used Margin
- Used Margin: The amount that is needed in your account as margin for open positions.