Saturday, 25th March 2017

google plus twitter

FX Trading Guide

What is the History of FX?

The Breton Woods Agreement was initiated in 1944 in an effort to keep cash from draining out of war-ravaged Europe. Currency movements were limited to 1% against the U.S. Dollar, which was fixed to the price of gold at 35 US Dollars an ounce. The modern era of foreign exchange first emerged in 1971 with the collapse of the Breton Woods Agreement. The U.S. Dollar was no longer convertible into gold and market forces were free to adjust foreign exchange rates, signalling an increase in currency market volatility and trading opportunities.

The collapse in 1973 of the subsequent Smithsonian and European Joint Float agreements signalled the true beginning of the free-floating currency exchange system that drives the markets today. Starting in the 1980’s, computer technology extended the reach of the exchange marketplace. Today, the values of the major world currencies are independent of each other.Up to questions

What is Foreign Exchange Market

Foreign Exchange is a currency market where the trading of one currency against another takes place. It is often referred to as Forex or FX.

The foreign exchange market is the largest most liquid and most influential market in the world. It is a truly 24 hour global market, it trades from 9pm GMT Sunday until 10pm GMT Friday and trades in excess of $1.5 trillion dollars a day, Making it far bigger than the combined total of all the worlds stock exchanges.

Participants in Forex include central banks, corporations, individual investors and speculators, and hedge funds. With the advent of electronic trading platforms, self-directed investors and smaller financial firms now have access to the same liquidity as larger market participants.

Trading, or speculation, makes up 95% of the daily volume. The other 5% of daily volume consists of governments and commercial companies converting one currency into another from buying and selling goods and services.

51% of the market is in spot FX transactions, followed by 32% in currency swap transactions. Forward outright FX transactions represent another 5% of this daily turnover. Options on inter-bank FX transactions making up another 8%.Up to questions

Why Trade FX?

Liquidity

The Forex market is the most liquid market in the world. Most speculators focus on trading the highly liquid Majors where approximately 85% of trading volume occurs. Other currency pairs are less liquid and therefore increases liquidity risk.

Unlike the stock market, where slippage can be a real concern, high liquidity in Forex means that trades will generally be filled at the order price. There are always plenty of buyers and sellers which helps make sure spreads are narrow.

24-Hour Trading

Since the market is almost always open, traders can react to market, economic and political news as it happens, locking in profits, protecting profits and cutting losses. The main trading centres are Sydney, Tokyo, London, Frankfurt and New York. Trading takes place during five overlapping trading sessions starting at 9pm GMT Sunday evening and ending on 10pm GMT Friday Evening.

Leverage - Trading on Margin

Trading on margin means that a trader can utilize more capital than they have in their account. The volatility of currency pairs is usually less than other markets, such as futures and equities. Since there is less movement, traders leverage their capital to make money on smaller moves. The amount of margin available in Forex is as high as 1% (100:1 leverage), and generally up to 2% (50:1 leverage). With £2,000 of capital, you can trade up to £400,000 at 50:1 and £500,000 at 100:1. Your individual broker will set the level of margin required on your account.

If you were to trade £100,000 GBP/USD you would be required to have at least £1000 at 1% margin or £2000 at 2% margin in your account to open the trade. Trading on margin is a double edged sword. You can lose money equally as fast as you make it. It is therefore vital to have a full understanding of the FX market and not commit too much of your equity to each trade.

Lower Transaction Costs – Tighter Spreads - No Commissions

Most Forex brokers do not charge commissions, but instead make money on the dealing spread. The Dealing Spread is difference between the bid and ask quote. The Bid is the price buyers are willing to buy, and the Ask is the price that sellers are willing to sell at any given time. Under normal market conditions the dealing spread would be no more than 5 pips.

Trade in rising or falling markets

With FX Trading you can trade long or short which means you can take a view on any currency pair and place a relevant trade. If you feel that the UK economy is strong and the US Dollar will weaken against the Sterling you would execute a BUY GBP/USD order. By doing so you have bought British pounds in the expectation that they will appreciate versus the US dollar. If you feel the UK will continue to weaken and this will hurt the British Pound, you would execute a SELL GBP/USD order. By doing so you have sold British pounds in the expectation that they will depreciate versus the US dollar.

Foreign Exchange Quoting Conventions

All currencies have a 3 letter code similar to an epic code for equities that identifies the currency; the most Commonly Traded Currencies are called the Majors.

The Majors
USD – US Dollar
JPY – Japanese Yen
EUR – Euro
GBP – British Pound
CAD – Canadian Dollar
AUD – Australian Dollar
CHF – Swiss Franc

When trading currencies, the trade is always done in pairs – currency Pair. One currency is bought and the other sold. For example, you buy British pounds against Euros, anticipating, the Pound to increase in value relative to the Euro. If the Pound rises relative to the Euro, you sell the position and have made a profit.

Commonly Traded Currency Pairs
USD/JPY – US Dollar and the Japanese Yen
EUR/USD – Euro and US Dollar
USD/CHF – US Dollar and Swiss franc
GBP/USD – British Pound and US Dollar

When quoting currency pairs, the first currency is referred to as the base currency and the second, the counter or quote currency. The base currency is always equal to 1 monetary unit of exchange, for example, 1 Dollar, 1 Pound, 1 Euro. The dominant base currencies are, in order of frequency, the EUR, GBP, and USD. The quote currency is translated into a certain number of units of the base currency. For example, a quote of USD/JPY at 1.20, says that for every 1 US Dollar, you get 1.20 Japanese Yen, while a quote for AUD/JPY of 67.73 says that for every 1 Australian Dollar, you get 67.73 Yen.

Currency pairs are generally traded as set unit quantities of the base currency (i.e. 100,000 units) For example, if you were buying GBP/USD at 1.7999 you would be paying Dollars for British pounds as follows: 100,000 x 1.7999 = $179,990 for 100,000 British pounds.

Dominant Base Currencies
EUR GBP USD
EUR/USD GBP/USD USD/CAD
EUR/CHF GBP/CHF USD/CHF
EUR/JPY GBP/JPY USD/JPY
EUR/CAD GBP/CAD  
EUR/GBP    

Up to questions

How are Prices quoted?

Just like in all markets, there are two prices for every currency pair. “BID” price on the left and the ASK (or offer) price on the right. The difference between these two prices is the spread, or the cost of the trade.

GBP/USD 1.7995 – 1.7999

Most currencies are quoted to four decimal places (with the exception of the Japanese Yen which is 2) you can see here that the difference is 4 units , each unit of price is known as a pip, so the difference is 4 pips.Up to questions

Placing a FX Trade

Because you can trade long or short you have two options with each currency pair A) Buy – in the expectation that the exchange rate will rise B) Sell – in the expectation the exchange rate will fall.

Example 1: BUY - Long Trade

Trader's Action Exchange Rate GBP Pos. USD Pos.
1) Buys 100k GBP/USD 1.7995-1.7999 100,000 -179,990
2) Sells 100k GBP/USD to close their position 1.8101-1.8105 -100,000 181,010
End result the trader earned a gross profit of $1,020 0 1,020

Example 2: SELL - Short Trade

Trader's Action Exchange Rate USD Pos. SGD Pos.
1) Sells 100k USD/SGD 1.6738-1.6745 -100,000 167,380
2) Buys 100k USD/SGD to close their position 1.6615-1.6619 100,000 -166,190
End result the trader earned a gross profit of SGD $1,190 0 1,190

You will see that the profit of a trade is always calculated in the second currency. If you are trading an account that is denominated in sterling, this profit will then need to be exchanged back into sterling using the current exchange rate.

Automatic Rollovers

The majority of FX Trades take place in what is called the spot market. This literally means that the deal takes place immediately "on the spot" and will settle in 2 working days. Most traders close out spot trades on the same day they are placed. However, any positions that are not closed out are automatically rolled over or changed for an identical position expiring on the next settlement day. The rate at which this happens is called the tom/next rate. The market sets this rate every day and it differs for each currency.Up to questions

Stop and Limit Orders

Because of the geared nature of trading on margin, the volatility of the FX Market and the fact that it trades 24 hours a day, it essential to have access to facilities that let you open or close positions if certain levels are reached.

Limit Order

A Limit order is one that is executed at a better price than the prevailing market price, i.e. for a Long FX Trade when the quoted currency drops to a certain level or for a Short FX Trade when the quoted currency rises to a certain level.

Example: GBP/USD is currently trading at 1.7995 – 1.7999

Investor A wishes to buy 100,000 GBP/USD with a limit of 1.7990, therefore they do not wish the order to be opened unless GBP/USD reaches 1.7990.

This order is held by the FX Trading provider until the limit level is reached.

The next day the GBP/USD is 1.7986 – 1.7990 and an opening trade of 100000 GBP/USD is opened at the limit level of 1.7990.

Stop orders

A stop order is one that is executed at a worse price than the prevailing market price one of the most common uses of this is a stop loss order. It is possible to make substantial profits when trading FX as well as substantial losses which is why many FX providers allow you to place a stop loss when you open a trade.

Stop Loss

A stop loss is a price level set by the client on a particular trade that if reached automatically closes out the particular position at the desired price.

Example: USD/EUR is trading at .8135 – .8139

Trader A and Trader B both believe that the US Dollar will strengthen against the euro and both buy 100000 USD/EUR TSB at .8139. However, Investor B also places a stop loss when he opens the trade at .8133

The following day USD/EUR drops steeply during the day trading down from .8135 to .8120

Investor A has not been watching the price of USD/EUR all day and therefore when he checks the price at the end of the day it is now .8120 – .8124 and he is running a $190 loss. Investor B has not been watching the market either however his position has been automatically closed out at his stop loss level of .8129 limiting his loss to just $60.

A stop order can also be used to open a trade for instance if you wished to open a Long position you may wait until the price was moving in the right direction and set a level higher than the prevailing market price.

City News

Republicans pull healthcare bill before vote

Thu, 1st Jan - * (ShareCast News) - The White House pulled its proposed bill to reform the US healthcare system at the last moment despite what some had assumed to be widespread Republican support to revamp Obamacare.

Which trading game would you like to trade with ?

Why not learn even more about spread betting with a FREE virtual trading account. BullBearings is the leading virtual trading website, allowing you to practice trading the markets without any risk.

Join for FREE

No thanks, I don't want to register, just let me read the FX Trading guide

  • Realistic trading in Shares, Forex, CFDs, Financial Spread Betting and Fixed Odds
  • NO RISK of losing real money
  • Our trading platform works with real stock exchange information
  • free private and public leagues to trade against friends or colleagues
  • Expert opinion and analysis on the latest trends in the markets