Sayamoza Move Forex Market

In the forex market, trades are made on many foreign currencies around the world. Much like in the equities market, in the forex there is a buyer and a seller behind every transaction. For example, in a trade on the EUR/USD currency pair, there is investor A, who is buying euros with dollars, and investor B, who is selling euros for dollars.

When a trade is agreed upon by buyer and seller, both parties have two business days to settle the deal. Continuing with our example, suppose investor B, who is selling euros, agrees to sell 100,000 euros on Monday to investor A. Investor B now has two business days - until end of the trading day on Wednesday - to deliver the 100,000 euros. However, investor B does not have to deliver by Wednesday - he or she also has the option to roll over the position to the next settlement date.

When an investor decides to roll over his or her position to the next settlement date, there is a possibility that he or she will either be charged or credited a fee. The costs arise as a result of the differential in interest rates between the two currencies that are traded. Whether an investor incurs a charge or earns a credit depends on which side of the trade the investor is on. The investor that is selling the currency with the higher interest rate will incur a charge, while the investor that is buying the currency with the higher interest rate will earn a credit. So, from our example, if the euro has a higher interest rate than the U.S. dollar, investor A would earn the credit and investor B would incur the charge.

Because positions can be rolled over within two business days, they are sometimes rolled over into a weekend when markets are closed. For example, suppose it is Wednesday and an investor is looking to roll over his or her position to Thursday. If the investor does this, the delivery date (the maturity date of a currency forward contract) of the position changes from Friday to Saturday. However, because no trading is done on the weekend, the delivery date is changed to Sunday, then to Monday. This creates a three-day rollover, for which the investor is charged three times the normal amount.

The cost of rollover is linked to the changing interest rates of underlying currencies and, therefore, brokers are unable to offer fixed rollover fees. Furthermore, the varying sizes of the positions available for investors to take also restricts brokers from charging fixed fees. Whenever an investor incurs a charge or earns a credit, the amount is electronically deducted from or added to the investor's account. Brokers will also usually stipulate that an investor maintain a minimum margin before he or she can earn credits from a rollover.

If you do not want to earn or pay interest on your positions, simply make sure they are all closed before 5:00 pm EST, the established end of the market day.

Here is a chart to help you out figure out the interest rate differentials of the major currencies. Accurate as of 10/4/2010.


Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought.

If you are buying a currency with a higher interest rate than the one you are borrowing, then the net interest rate differential will be positive (i.e. USD/JPY) and you will earn funds as a result.

Conversely, if the interest rate differential is negative then you will have to pay.

Ask your broker or dealer about specific details regarding rollover.

Also note that many retail brokers do adjust their rollover rates based on different factors (e.g., account leverage, interbank lending rates). Please check with your broker for more information on rollover rates and crediting/debiting procedures.

This is probably the most used word in term of currency trading; Pip. Not only that it is easy to be spelled but also because it is what traders hunt in currency trading. Many trader say that knowing how many pips you gain or lose is more important than knowing how much money you gain or lose (in few case, I agree with this opinion).

In brief and general, forex pip is the smallest price change that a given exchange rate can make. Therefore defining ‘1 pip‘ for each currency pairs is dependent on the exchange rate (quoted price) given to the related pair. Let me take GBP/USD, GBP/JPY as an example. What is ‘1 pip’ for those pairs?

• GBP/USD are commonly quoted into four decimal points (eg, 1.8397). Then ‘1 pip‘ for GBP/USD in this case is equal to 0.0001 price change (be it higher or lower).
   
• GBP/JPY are commonly quoted into two decimal points (eg, 193.57). Then ‘1 pip’ for GBP/JPY in this case is equal to 0.01 price change (be it higher or lower).

Now let’s bring it a bit further. Many traders probably do not realize that the ‘decimal points’ matter is particularly depending on related forex-broker’s policy. Any forex broker could implements different decimal points from the other company do for the same currency pair.

For example, Broker x has recently implemented five decimal points for GBP/USD (eg, 1.83972). This subsequently gives different definition to ‘what 1 pip is‘ for this pair (compared to the above example). In this case, ‘1 pip’ for GBP/USD is equal to 0.00001 price change.

Pip Value

The term PIP is used often. A pip, which stands for "price interest point," represents the smallest fluctuation in the price of a currency. This is similar to the "tick" concept for stocks.

So how much is a pip worth? The value of a pip depends on the size of the contract (or lot) that is traded. Most online forex brokers offer regular contracts (or lot) sizes of 100,000 units of the base currency. With this figure in mind, we could determine what a pip is worth.

Let's take the quote example: EUR/USD = 1.2125

If 1 euro equals 1.2125 dollars, then 1 lot (or contract) of 100,000 euros should be worth 121,250 dollars and a fluctuation of 0.0001 (1 pip) should be worth 100,000 x 0.0001 = 10 dollars. Therefore, every time the price of the euro versus the dollar fluctuates by one pip, the value of each contract changes by 10 dollars. For currencies that are quoted in terms of dollars (that is, when the USD is the quote currency), the PIP value is fixed (10 dollars if the currency is quoted to the fourth decimal place). This is what is called a "static pip value" because the value is constant relative to the dollar. Mayor currencies (other than the EUR/USD) with a static pip values are the GPB/USD (British Pound versus the US Dollar - also known as "cable") and the AUD/USD (Australian Dollar versus the US Dollar - also know as "aussie").

Are there currencies with a "variable pip value?" Yes there are. A currency with a variable pip value is one that has the dollar as the base currency. The mayor currencies or "mayors" with a variable pip value are the USD/JPY, the USD/CHF (US Dollar versus the Swiss Franc), and the USD/CAD (US Dollar versus the Canadian Dollar). Using the earlier example of the USD/JPY = 107.65, if:

1 USD equals 107.65 yen, then 1 lot of 100,000 dollars should be worth 10,765,000 yen and one pip should be worth 100,000 x 0.01 = 1000 yen. If we want to turn this value into dollars, we have to divide by the current exchange rate (107.65 yen per dollar). Thus, 1000 / 107.65 = 9.29 dollars. We automatically conclude that the value of one pip in the dollar-yen currency pair (in terms of dollars) will always vary as the exchange rate varies.

In forex trading, there are two prices for each currency pair, a “bid” (or sell) price and an “ask” (or buy) price. The bid price is the rate at which traders can sell to the executing firm, while the ask price is the rate at which traders can buy from the executing firm.



For example, when you see the price quote of EUR/USD is 1.2881/1.2884 as in the above picture, the bid is 1.2881 whereas the ask is 1.2884. That means traders looking to sell must do so at 1.2881, those looking to buy must do so at 1.2884.

The difference between the bid and ask price is the “spread”, which constitutes the cost of the trade. If a trader buys at 1.2884 and then sells immediately, there is a 3-point loss incurred. The trader will need to wait for the market to move 3 points in favor of her position in order to break even. If the market moves 4 points in your favor, she starts to profit.

In fact, all traded instruments - currencies, stocks, futures, bonds, etc.. have spread.

Many online trading firms like to promote forex trading as an almost cost-free instrument: commission free, no service charge, no hidden cost, etc. Traders should know that spread is the cost of trading, and in fact, it also represents the main source of revenue for the market maker, i.e. the forex trading company. The spread may appear to be a minuscule expense, but once you add up the cost of all of the trades, you will find it can eat away quite a portion of your account or your profit. If you check the price tag of a T-shirt before you buy it, do the same thing when you trade forex, look into the spread before you decide to trade. Your trade needs to surmount the spread (the cost) before it profits.

Know your expense: The Spread

Spread is the cost to a trader. On the other hand, it is a revenue source of the firm who executes the trade. In the foreign exchange market, the spread can vary a lot depending on the executing firm and the parties involve. Inter-bank foreign exchange can have spread as tight as 1-2 pips, while the bank can widen the spread to 30-40 pips when dealing with individual customers. If you check out the spread of those small exchange shops nearby the tourists sights, you may find the spread can go up to 400 to 600 pips.

Thanks to keen market competition, the spread of online forex trading is getting tighter in the past few years. For major online forex companies, their spreads are essentially the same. The table shows the typical spread of four major currencies of online forex trading at the time being:

It is important for a trader to find the tightest spread as possible, but anything that is far lower than the typical spread is skeptical. The spread is the main source of revenue of a forex trading firm, if the firm cannot earn enough from the spread, there maybe some other hidden cost in the transaction.

Another point to note is that many market makers often widen the spread when market conditions become more volatile, thus increasing the cost of trading. For instance, if an economic number comes out that is off expectations, thereby creating a flood of buyers or sellers, the market maker may often widen the spread to restore the balance between buyers and sellers. As a result, traders should inquire about the execution practices of their clearing firm; firms with poor execution of orders and a tendency to widen spreads will ultimately result in higher trading costs for the end user.

It is important for an investor to understand how to interpret forex quotes as well as the basic terminology of the forex market, before he starts trading. Each foreign exchange transaction involves the simultaneous buying of one currency and the selling of another. It is said that both of these two currencies make up a specific currency pair. An example of a currency quote (exchange rate) of the dollar versus the yen is:


The currency to the left of the forward slash ("/") is called the base currency and the one on the right is called the quote currency or counter currency. In the example above, the US Dollar is the base currency in the quote and the Japanese is the counter currency. The notation above means that 1 dollar is equal to 105.24 yen; in other words, one unit of the base currency is equal to 105.24 units of the counter currency (or whatever number is shown instead of the 105.24). If you are buying, the exchange rate specifies how much of the quote currency you have to pay to buy one unit of the base currency. For the example above, 1 US Dollar costs 105.24 Japanese Yen. On the other hand, if you are selling, foreign exchange quote specifies how much units of the counter currency you will receive if you sell one unit of the base currency. You will receive 105.24 yen when you sell one US Dollar.

As with every financial commodity, a forex quote includes a bid price (or bid) and an ask price (or ask). Look at the example below that was taken from a live quote of our free forex trading software:


In the example above, the bid price is 114.84 yen and the ask price is 114.88 yen [the dark blue digits above represent the last two digits of the quote]. The dealers are willing to buy the base currency at the the bid price, so users of our software can sell at this price. Therefore, if an FX trader presses the "Sell" button, he would sell dollars at 114.84 yen. The ask price, on the other hand, is the price at which dealers are willing to sell the base currency and users of our software could buy it. By clicking "Buy," an investor would be buying dollars at 114.88 yen.

Despite the fact that there are many different currencies all over the world, 85% of all the daily trading volume is concentrated in a small group of currencies known as the "Majors." The "major" currencies include U.S. Dollar (USD), the Japanese Yen (JPY), the Euro (EUR), the British Pound (GBP), the Swiss Franc (CHF), the Canadian Dollar (CAD) and the Australian Dollar (AUD). The major currency pairs that are traded the most are EUR/USD, USD/JPY, GBP/USD, and USD/CHF. USD/CAD and AUD/USD are also actively traded, but not as much as the others mentioned. The major currency pairs (most liquid) are the ones that offer forex traders the best opportunities.

Live Forex Quotes

The live forex quotes below were taken from the forex software. The first example is a quote for the euro versus the dollar, the second example shows the pound versus the dollar, and the third exchange rate is for the dollar-swiss franc. All of these forex quotes are of major currency pairs.


The first example above indicates that buying one euro would cost 1.2434 US dollars and selling would generate 1.2431 US dollars.

To see actual live quotes of different currencies, you can sign up for a demo of our free trading platform by clicking the appropriate link below. With the software, you will also get to trade different currency pairs in the live market.

Now that you know how forex is traded, it’s time to learn how to calculate your profits and losses. When you close out a trade, take the price (exchange rate) when selling the base currency and subtract the price when buying the base currency, then multiply the difference by the transaction size. That will give you your profit or loss.

Price (exchange rate) when selling the base currency – price when buying the base currency X transaction size = profit or loss

Let’s look at an example.

Assume you buy Euros at $1.2178 per Euro and sell Euros at $1.2188 per Euro. The transaction size is 100,000 Euros. To calculate your profit or loss, you take the selling price of $1.2188, subtract the buying price of $1.2178 and multiply the difference by the transaction size of 100,000.

($1.2188 – 1.2178) X 100,000 = $100

In this example, you would have a $100 profit from this transaction.

Let’s try it again using a different currency.

Assume you buy British pounds at $1.8384 and sell them at $1.8389. The transaction size is 10,000. What is your profit or loss?

By following the formula we discussed earlier, you should be able to determine that you would see a $5.00 gain from this transaction.

($1.8389 – $1.8384) X 10,000 = $5.00

Now you try it.

If you sell 100,000 Euros at $1.2170 per Euro and buy 100,000 Euros at 1.2180 per Euro, would you have a profit or loss on the transaction and how much would it be?

Take the selling price of $1.2170 and subtract the buying price of $1.2180 and then multiply the difference by 100,000.

($1.2170 – $1.2180) X 100,000 = –$100

If you calculated a loss of $100, you calculated correctly.

You can also calculate your unrealized profits and losses on open positions. Just substitute the current bid or ask rate for the action you will take when closing out the position. For example, if you bought 100,000 Euros at 1.2178 and the current bid rate is 1.2173, you have an unrealized loss of $50.

($1.2173 – $1.2178) X 100,000 = –$50

Similarly, if you sold 100,000 Euros at 1.2170 and the current ask rate is 1.2165, you have an unrealized profit of $50.

($1.2170 – $1.2165) X 100,000 = $50

If the quote currency is not in US dollars, you will have to convert the profit or loss to US dollars at the dealer’s rate.

Let’s look at an example using a USD/JPY spread. If you lost 50,000 Japanese yen on the transaction and the dealer’s rate is $0.0091 for each yen, what is your loss in dollars?

By multiplying the transaction size (50,000) by the dealer's rate ($0.0091), you will find that your loss is $455.

50,000 X $0.0091 = $455

Remember that you must also subtract any dealer commissions or other fees from your profits or add them to your losses to determine your true profits and losses. Also, remember that the dealer makes money from the spread. If you immediately liquidate your position using the same spread, you will automatically lose money.

Quiz #2

A speculator believes that the Swiss Franc will appreciate against the US Dollar and enters into a forex transaction when the USD/CHF spread is 1.2584/1.2586. In this situation, what will the speculator do?

• A. Sell US dollars and buy Swiss francs at 1.2586
• B. Sell US dollars and buy Swiss francs at 1.2584
• C. Sell Swiss francs and buy US dollars at 1.2586
• D. Sell Swiss francs and buy US dollars at 1.2584

The correct answer is B.

In this case, the speculator needs to buy Swiss Francs and sell US Dollars. That eliminates C and D as possible answers. In order to identify the correct answer, it is helpful to review the concept of the bid/ask spread. When you sell dollars to a dealer, the dealer wants to buy the currency at the bid price. In this case, when you sell dollars to the dealer, you will receive only 1.2584 Swiss francs for every dollar you sell.

If a speculator buys a EUR/USD spread when the spread is 1.1020/24 and immediately sells it back to the dealer at the same spread, what will be the end result?

• A. 4 point gain
• B. 4 point loss
• C. No gain or loss
• D. There is not enough information in the problem to answer the question.

The correct answer is B.

When the dealer quotes a spread, the dealer is seeking to buy at the low price and sell at the high price. If a speculator enters this spread, she will have bought the currency at 110.24 and when she sells the currency back, she will have sold it for 110.20, giving her an immediate four point loss.

A speculator with $500,000 wants to buy Canadian dollars when the spread is 1.1957/62. The position is offset when the spread is 1.1862/66. What will be the result?

• A. US $5,000 gain
• B. US $5,000 loss
• C. US $3,834 gain
• D. US $3,834 loss

The correct answer is C.

In this case, our speculator sold US dollars and received Canadian dollars. As a result, the speculator received 1.1957 Canadian dollars for each US dollar (the bid price, or the price at which the dealer would be willing to sell Canadian dollars for US dollars). The speculator received 597,850 Canadian dollars (1.1957 X 500,000). Subsequently, the value of the US dollar depreciated against the Canadian dollar. The speculator bought 500,000 US dollars and sold Canadian dollars for 1.1866 (the dealer ask price) and paid 593,300 Canadian dollars. The speculator still had 4,550 Canadian dollars, which represents his profit. However, before you can answer the question, you must convert Canadian dollars into US dollars.

To solve this problem, you need to find out how many US dollars it takes to buy 4,550 Canadian dollars. When the speculator reversed the long Canadian dollar position, it took him 1.1866 Canadian dollars to buy one US dollar; so to find his profit, the speculator can simply divide the Canadian dollar profit (Canadian 4,550) by 1.1866 Canadian dollars per US dollar. The result is $3,834 US dollars.

In the forex market, you buy or sell currencies..

Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.

The object of forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.

Example:

Trader's Action	Euros	US Dollars
You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800	+10,000	-11,800*
Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500	-10,000	+12,500**
You earn a profit of $700	0	+700

*EUR 10,000 x 1.1800 = US $11,800 ** EUR 10,000 x 1.2500 = US $12,500

An exchange rate is simply the ratio of one currency valued against another currency. For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.

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.

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".
Just remember: Short = Sell.

Bid/Ask Spread

All forex quotes are quoted with two prices: the bid and ask. For the most part, the bid is lower than the ask price.


The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency. This means the bid is the best available price at which you (the trader) will sell to the market.

The ask is the price at which your broker will sell the base currency in exchange for the quote currency. This means the ask price is the best available price at which you will buy from the market. Another word for ask is the offer price.

The difference between the bid and the ask price is popularly known as the spread.

On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588. 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 1.34568. If you want to buy EUR, you click "Buy" and you will buy euros at 1.34588.

Time to Make Some Dough

In the following examples, we are going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair.

If you always fell asleep during your economics class or just flat out skipped economics class, don't worry! We will cover fundamental analysis in a later lesson.

But right now, try to pretend you know what's going on...

EUR/USD

In this example, the euro is the base currency and thus the "basis" for the buy/sell.

If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, you would execute a BUY EUR/USD order. By doing so, you have bought euros in the expectation that they will rise versus the U.S. dollar.

If you believe that the U.S. economy is strong and the euro will weaken against the U.S. dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will fall versus the US dollar.

USD/JPY

In this example, the U.S. 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 rise versus the Japanese yen.

If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to yen, and this will hurt the U.S. 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 pound is the base currency and thus the "basis" for the buy/sell.

If you think the British economy will continue to do better than the U.S. in terms of economic growth, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will rise versus the U.S. dollar.

If you believe the British's economy is slowing while the United States' economy remains strong like Jack Bauer, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the U.S. dollar.

USD/CHF

In this example, the U.S. dollar is the base currency and thus the "basis" for the buy/sell.

If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought U.S. dollars in the expectation that they will appreciate versus the Swiss Franc.

If you believe that the U.S. housing market weakness will hurt future economic growth, which will weaken the dollar, you would execute a SELL USD/CHF order. By doing so you have sold U.S. dollars in the expectation that they will depreciate against the Swiss franc.

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.

Before trading forex, you will have to open a trading account with a forex dealer. There are no rules about how a dealer charges a customer for the services the dealer provides or that limit how much the dealer can charge. Before opening an account, you should check with several dealers and compare their charges as well as their services.

Some firms charge a per trade commission, while other firms make their money on the spread between the bid and ask prices they give their customers. In the earlier example, the amount of the Euro spread is 0.0008 (the 1.2178 ask price minus the 1.2170 bid price). This means that if you bought (or sold) the Euro and immediately turned around and sold (or bought) it before the prices changed, you would have a $0.0008 loss on each Euro, or an $80 loss on a 100,000 Euro transaction. The wider the spread, the more the price has to move before you break even.

While some forex firms advertise “commission free” trading, they are still making money from your trades through the bid/ask spread. Before opening a trading account, be sure you know how all the parties involved are being compensated.

How do I close out a trade?

Retail forex transactions are normally closed out by entering into an equal but opposite transaction with the dealer. For example, if you bought Euros with US dollars, you would close out the trade by selling Euros for US dollars. This also is called an offsetting or liquidating transaction.

Many retail forex transactions have a settlement date when the currencies are due to be delivered. If you want to keep your position open beyond the settlement date, you must roll the position over to the next settlement date. Some dealers roll open positions over automatically, while other dealers may require you to request the rollover. Some dealers charge a rollover fee based upon the interest rate differential between the two currencies in the pair. You should check your agreement with the dealer to see what, if anything, you must do to roll a position over and what fees you will pay for the rollover.

Now let’s take a look at how foreign currencies are quoted and priced. Currencies are designated by three-letter symbols. The standard symbols for some of the most commonly traded currencies are shown below.

USD United States dollar
EUR Euros
JPY Japanese yen
GBP British pound
CHF Swiss franc
AUD Australian dollar
CAD Canadian dollar

Currency pairs are often quoted as bid-ask spreads. The first part of the quote is the amount of the quote currency you will receive in exchange for one unit of the base currency (the bid price). The second part of the quote is the amount of the quote currency you must spend for one unit of the base currency (the ask or offer price). For example, a EUR/USD spread of 1.2170/1.2178 means that you can sell one Euro for $1.2170 and buy one Euro for $1.2178. This spread could also be quoted as 1.2170/78.

At first glance, the bid and ask prices may seem backwards to you. That is because they are listed from the dealer’s point of view, not from your point of view. The first part of the spread, or the bid, is what the dealer is willing to pay to buy the base currency. So this is the price you will get if you SELL the base currency. In the same way, the second part of the spread, or the ask, is what the dealer is willing to sell the base currency at, so this is the price you will get if you BUY the base currency.

Let’s look at another example.

If the USD/CHF spread is listed as 1.2440/1.2443, you can sell one US dollar for 1.2440 Swiss francs and buy one US dollar for 1.2443 Swiss francs.
Remember that the forex market has no central marketplace. The forex dealer determines the execution price, so you are relying on the dealer’s integrity for a fair price.

Quiz #1

In this currency pair, which is the base currency?

CAD/USD

The correct answer is the Canadian dollar, or CAD. Remember, the first currency in a currency pair is the base currency and the second currency is the quote currency.

Using this USD/JPY spread (110.45/55), how many Japanese yen would it take to buy one US dollar?

It would take 110.55 yen to purchase one US dollar.

Who determines the execution price — the trader, the dealer or the exchange?

The correct answer is the dealer. Remember that the forex markets we are discussing have no central exchange on which the contracts are traded, and you as the trader have no control over the execution price.

Let’s start with a definition of foreign currency exchange rates. Simply put, foreign currency exchange rates are what it costs to exchange one country’s currency for another country’s currency. For example, if you go to England on vacation, you will have to pay for your hotel, meals, admissions fees, souvenirs and other expenses in British pounds. Since your money is all in US dollars, you will have to sell some of your dollars to buy British pounds.

Let’s assume that you have decided to take a trip to England. Before you leave, you go to your bank and buy $1,000 worth of British pounds. If you get 565.83 British pounds (£565.83) for your $1,000, each dollar is worth 0.56583 British pounds. This is the exchange rate for converting dollars to pounds.

After spending a few days in England, you realize that £565.83 won’t be enough to cover all of your expenses. So you go to a bank in England and buy another $1,000 worth of British pounds. This time, however, you get only £557.02 for your $1,000. The exchange rate for converting dollars to pounds has dropped from 0.56583 to 0.55702. This means that US dollars are worth less compared to the British pound than they were before you left on vacation.

When you arrive home, you still have some British pounds left. So you go to your bank and use your remaining £100 to buy US dollars. If the bank gives you $179.31, each British pound is worth 1.7931 dollars. This is the exchange rate for converting pounds to dollars.

But what if you were travelling to France? The currency used in France is the Euro. If you go to your bank and buy $1,000 worth of Euros with an exchange rate of 0.8064, how many Euros will you get?

Exchanging $1,000 for Euros with an exchange rate of 0.8064 means you will receive 806.40 Euros. Conversely, if you were living in France and planned a vacation in the United States, you would go to your bank to buy US dollars with Euros.

If the exchange rate was 1.2403, how many U.S. dollars would you get for your 1,000 Euros?
You would receive $1,240.30 for your 1,000 Euros.

Theoretically, you can convert the exchange rate for buying a currency to the exchange rate for selling a currency, and vice versa, by dividing 1 by the known rate. For example, if the exchange rate for buying British pounds with US dollars is 0.56011, the exchange rate for buying US dollars with British pounds is 1.78536. In other words, one divided by 0.56011 equals 1.78536. Similarly, if the exchange rate for buying US dollars with British pounds is 1.78536, the exchange rate for buying British pounds with US dollars is 0.56011 (or one divided by 1.78536 equals 0.56011). This is how newspapers often report currency exchange rates.

As a practical matter, however, you will not be able to buy and sell the currency at the same price, and you will not receive the price quoted in the newspaper if you trade forex. That is because banks and other market participants make money by selling the currency to customers for more than they paid to buy it and by buying the currency from customers for less than they will receive when they sell it. This difference is called a spread and we’ll talk more about spreads later.

As you can see, currency exchange rates fluctuate. Retail customers who trade in the forex market hope to profit from those fluctuations.

Although every investment involves some risk, the risk of loss in trading foreign exchange contracts can be substantial. Therefore, if you are considering participating in this market, you should understand some of the risks associated with this product so you can make an informed decision before investing.

As stated in the introduction to this blog, off-exchange foreign currency trading carries a high level of risk and may not be suitable for all customers. The only funds that should ever be used to speculate in foreign currency trading, or any type of highly speculative investment, are funds that represent risk capital – i.e., funds you can afford to lose without affecting your financial situation. There are other reasons why forex trading may or may not be an appropriate investment for you, and they are highlighted below.

• The market could move against you.
  No one can predict with certainty which way exchange rates will go, and the forex market is volatile. Fluctuations in the foreign exchange rate between the time you place the trade and the time you close it out will affect the price of your forex contract and the potential profit and losses relating to it.
   
• You could lose your entire investment.
  You will be required to deposit an amount of money (often referred to as a “security deposit” or “margin”) with your forex dealer in order to buy or sell an off-exchange forex contract. As discussed earlier, a relatively small amount of money can enable you to hold a forex position worth many times the account value. This is referred to as leverage or gearing. The smaller the deposit in relation to the underlying value of the contract, the greater the leverage.If the price moves in an unfavorable direction, high leverage can produce large losses in relation to your initial deposit. In fact, even a small move against your position may result in a large loss, including the loss of your entire deposit. Depending on your agreement with your dealer, you may also be required to pay additional losses.
   
• You are relying on the dealer’s creditworthiness and reputation.
  Retail off-exchange forex trades are not guaranteed by a clearing organization. Furthermore, funds that you have deposited to trade forex contracts are not insured and do not receive a priority in bankruptcy. Even customer funds deposited by a dealer in an FDIC-insured bank account are not protected if the dealer goes bankrupt.
   
• There is no central marketplace.
  Unlike regulated futures exchanges, in the retail off-exchange forex market there is no central marketplace with many buyers and sellers. The forex dealer determines the execution price, so you are relying on the dealer’s integrity for a fair price.
   
• The trading system could break down.
  If you are using an Internet-based or other electronic system to place trades, some part of the system could fail. In the event of a system failure, it is possible that, for a certain time period, you may not be able to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. A system failure may also result in loss of orders or order priority.
   
• You could be a victim of fraud.
  As with any investment, you should protect yourself from fraud. Beware of investment schemes that promise significant returns with little risk. You should take a close and cautious look at the investment offer itself and continue to monitor any investment you do make.

As with any investment, you should protect yourself against fraud. Over the last few years, there has been a sharp rise in foreign currency scams, and you should do as much due diligence as you can before trading forex.

Here are some tips to help you avoid becoming a victim of a forex scam.

• Stay away from opportunities that sound too good to be true.
  In general, get-rich-quick schemes tend to be frauds. For example, avoid any forex company that predicts or guarantees large profits. If a company says that they will double or triple your money in one month or will guarantee a monthly return, walk away.
   
• Stay away from forex companies that promise little or no financial risk.
  There is no doubt that trading forex is risky, so if someone is telling you the opposite, they are not being truthful. Beware of forex companies that make the following types of statements: “Whichever way the market moves, you can’t lose” or “While there is risk, it is substantially outweighed by the reward.”
   
• Check the background of everyone you will be dealing with.
  If you cannot satisfy yourself that the persons are completely legitimate and above-board, the wisest course of action is to avoid trading through those companies.

Conclusion
This blog cannot tell you whether you should participate in the foreign exchange market. You should make that decision after consulting with your financial advisor and considering your own financial situation and objectives. However, we hope that this blog is helpful in raising some of the issues that you need to consider in order to make a fully informed decision about investing in the foreign exchange market.

 

One of the basic factors of your success in the forex market is a correct broker choice, or, in other words, the companies in which you will open the bill and through which will spend currency transactions.

If you are new to the forex market, it is recommended that you find a broker to help with your forex trading strategy and transactions. There are a wide variety of brokers available to you, so be prepared to ask some main questions. These include:

1. What is your spread?
   (Hint: The lower the spread the more money you make!)
    
2. What are your credentials?
   (Hint: There are certain affiliations you should look for)
    
3. What tools are available to help me learn more?
   (Hint: Not all broker firms are created equal. Find out who offers the best resources and information to help you make the smartest trading decisions)
    
4. What is your leverage?
   (Hint: This is the determining factor on how much money you are able to make with each investment)

The correct broker choice will help, both to increase capitals, and to save weight of nervous cells. Now there is a set of the companies, rendering broker services. All of them can be divided on two basic categories:

• Dealing centers;
• Investment banks.

There will be the list of key parameters, being fundamental at a choice of the broker, from the most important up to insignificant.

The sum of your starting capital

So, the basic factor at broker choice is the size of your starting capital. The overwhelming majority of broker companies demand the deposit over $2,000. The companies are widespread also, beginning to work with $10,000. And it does not mean, that for a greater sum of the enclosed means you will offered the best conditions and absolute guarantees of duly payments and to safety of earnings. All depends on the concrete service provider. There are offers to begin forex market trading with $1,000 and even less (so-called mini-forex market) when your position is not deduced on the market directly but only by means of summation of positions of several participants. If you adhere to belief that it is necessary to start to work only with solid banks the size of your bill cannot be less than $50,000, and more often $100,000.

That is, Wide Range of Leverage Options - Leverage is necessary in forex because the price deviations (the sources of profit) are merely fractions of a cent. Leverage, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means your broker would lend you $100 for every $1 of actual capital. Many brokerages offer as much as 250:1. Remember, lower leverage means lower risk of a margin call, but also lower bang for your buck (and vice-versa).

Note: Your broker offers high leverage if you have limited capital. If capital is not a problem, any broker with a wide variety of leverage options should do. A variety of options lets you vary the amount of risk.

Main rule which it is necessary to adhere at definition of the starting sum of your capital - loss even all sum should not be ruinous. It is not necessary to perceive seriously also offers of the tenders with $100, etc. The optimum quantity of the enclosed means, especially beginning player is in a range $2000 - $10000.

Broker's reputation

Before an investment it is necessary to collect full information about your future broker. Pay attention for the period of existence of the company in the market of services and broker license. It is obvious, that more "age" brokers are more preferable than beginners because of stability and reliability. Though sometimes the new companies offer the most comfortable operating conditions. Ask familiar forex market traders or visit forums on the Internet, devoted to currency forex market trading. Usually facts of swindle don't remain unnoticed in forex trader's environment. Certainly, it is possible to come across an anti-advertising but if the name of your potential broker often appears in various black lists, it is necessary to concern to such facts with enhanced attention. Choose those brokers about whom it will be possible to collect as many as possible positive responses.

Unlike equity brokers, forex brokers are usually tied to large banks or lending institutions because of the large amounts of capital required (leverage they need to provide). Also, forex brokers should be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). You can find this and other financial information and statistics about a forex brokerage on its website or on the website of its parent company. Bottom line: Make sure your broker is backed by a reliable institution!

Operating time

The preference should be given the companies which open at night on Monday and finish job more close to midnight on Friday. Imagine, that you leave a profitable position on target with the purpose to earn more. Put the protective order so that even at a failure to earn a little and go easy to have a rest, hoping noticeably to increase the capital. Can happen, that at night on Monday there was the unexpected event promoting sharp jump of a forex rate against your position. The broker who comes on job to nine mornings, will execute the protective order under that price which he will see on the monitor. Thus, because of a break in job of the broker to you will leave risky enough a position opened on the days off.

Account Types

Many brokers offer two or more types of accounts. The smallest account is known as a mini account and requires you to trade with a minimum of, say, $250, offering a high amount of leverage (which you need in order to make money with so little initial capital). The standard account lets you trade at a variety of different leverages, but it requires a minimum initial capital of $2,000. Finally, premium accounts, which often require significant amounts of capital, let you use different amounts of leverage and often offer additional tools and services.

Note: Make sure that the broker you choose has the right leverage, tools, and services relative to your sum of capital.

Commission fee

By granting services in the forex market the broker earns only a so-called spread - a difference between purchase price and sale price of currency. Do not confuse forex market to an equity market where from each transaction commission fee are kept from you. Overwhelming majority of brokers on forex market earns only a spread. Therefore if the bank or dealing center at which any additional commission is provided will get to you, safely pass to search of other variant as it is excessive to remind, that any commission fee negatively affect a status of your bill. It is necessary to remember, that everywhere there is a commission for carry of a position in day - so-called Swap. But Swap has feature to be not only negative, but also positive. The status of your deposit depends on commission fee.

Spread

Spread - the basic earnings of the broker. There are two versions of brokers: with the fixed spread and with floating spread. The fixed spread is characterized by a constant difference between a forex rate of purchase and sale without dependence from a market situation. Many dealing centers practise a rule of a floating spread, being limited to a rule, that the steady spread is saved in the quiet market. However practically every day there are some moments of sharp fluctuation of the prices in which a spread's enlargement on 50 (!) pips not only creates inconveniences, but it can appear rather pernicious for the deposit. But the floating spread has advantages. For example, in the quiet market the floating spread can decrease up to 1-2 pips when fixed remains to constants in any situation.

That is, Low Spreads is the difference between the price at which a currency can be purchased and the price at which it can be sold at any given point in time. This difference is how forex brokers make money because they don't charge a commission. In comparing brokers, you will find that the difference in spreads in forex is as great as the difference in commissions in the stock arena. Note: Lower spreads save you money!

Various additional restrictions

In this item it would be desirable to warn beginning forex trader that many broker firms practise additional restrictions on conducting forex market trading. The most widespread restriction is a position about obligatory quantity of transactions for a time interval, for example for a month. Closely concern to the conclusion of the contract, define, what restrictions for you are obviously unacceptable.

Technical support

Without fail there should be a constant round-the-clock communication with the forex trader, it is desirable not only by means of the electronic terminal, but also ordinary telephone. Technical support in the majority of the broker's companies works from 9 up to 18. Unfortunately, it is difficult to test job of communication before opening the bill.

Additional service for clients

Various programs of a technical analysis, reception of free-of-charge quotations and news will essentially facilitate your life, especially in the first months of trading. Pay attention to this item if there was a choice before you between two equivalent broker firms.

Software convenience

Certainly, it is possible to get used to any software. But nevertheless before the conclusion of the contract it is recommended to establish a demo account. The friendly, clear interface will promote pleasant job since the first days.

forex brokers offer many different trading platforms for their clients. These trading platforms often feature real-time charts, technical analysis tools, real-time news and data, and even support for trading systems - that is Extensive Tools and Research. Before committing to any broker, be sure to request free trials to test different trading platforms and offered Tools and Research. Brokers usually also provide technical and fundamental commentaries, economic calendars etc. Note: Find a broker who will give you what you need to succeed!

Avoid the following things:

• Sniping or Hunting
  Prematurely buying or selling near preset points (that is Sniping or Hunting)- are shady acts committed by forex brokers to increase their profits. Obviously, no broker admits to committing these acts, but a notion that a broker has practiced sniping or hunting is commonly believed to be true. Unfortunately, the only way to determine which brokers do this and which brokers don't is to talk to fellow traders.
  
  Note: Talk and discuss on forums to find out who is an honest broker.
   
• Strict Margin Rules
  When you are trading with borrowed money, your broker has a say in how much risk you take. As such, your broker can buy or sell at its discretion, which can be a bad thing for you. Let's say you have a margin account, and your position takes a dive before rebounding to all-time highs. Well, even if you have enough cash to cover, some brokers will liquidate your position on a margin call at that low. This action on their part can cost you dearly.
  
  Note: Talk and discuss on forums to find out who is an honest broker.

The dream of many forex trader - is to work with the ideal broker meeting all set forth above requirements. However it is checked up in practice, the ideal broker does not exist. Always it is necessary to be reconciled with any lacks. Before a choice of the broker be defined with the moments most basic for you, what qualities of the broker cost at you on the first place.