Trading for Beginners
What is FX?
Forex, also known as foreign exchange, FX or currency trading, is a
decentralized global market where all the world's currencies trades are. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. There is no central exchange as it trades over the counter. Forex trading allows you to buy and sell currencies, similar to stock trading except the fact that you can do it anytime on the weekdays. You will have access to margin trading and gain exposure to international markets.
What is the exchange rate?
The foreign exchange market is a global
decentralized marketplace that determines the relative values of different currencies. Unlike other markets, there is no
centralized depository or exchange where transactions are conducted. Instead, these transactions are conducted by several market participants in several locations. It is rare that any two currencies will be identical to one another in value and it's also rare that any two currencies will maintain the same relative value for more than a short period of time. In forex, the exchange rate between two currencies is constantly changing.
Why does exchange rate change?
Currencies trade on an open market, just like stocks, bonds, computers, cars and many other goods and services. A currency's value fluctuates as its supply and demand fluctuate, just like anything else.
An increase in supply or a decrease in demand for a currency can cause the value of that currency to fall.
A decrease in the supply or an increase in demand for a currency can cause the value of that currency to rise.
A big benefit to forex trading is that you can buy or sell any currency pair, at any time subject to available liquidity. So if you think the Eurozone is going to break apart, you can sell the euro and buy the dollar (sell EUR/USD). If you think the price of gold is going to go up, and based on historical correlation patterns, you think the value of gold affects the value of the Australian dollar, you might decide to buy the Australian dollar and sell the U.S. dollar (buy AUD/USD).
This also means that there really is no such thing as a "bear market" in the traditional sense. You can make (or lose) money when the market is trending up or down.
What is Margin FX transaction?
The foreign exchange market (forex, FX, or currency market) is a global
decentralized market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. A Margin FX Transaction is a non-deliverable, leveraged, rolling foreign exchange transaction in relation to an agreed Currency Pair. Margin FX Transactions non-deliverable. they are cash-adjusted or cash-settled. In other words, there is no physical payment of the principal amount of the foreign currencies subject of the Margin FX Transaction. Margin FX Transactions are over-the-counter ("OTC”) transactions.
What is Leverage/Margin?
As mentioned before, all trades are executed using borrowed money. This allows you to take advantage of the leverage. Leverage of 50:1 allows you to trade with $1,000 in the market by setting aside approximately $20 as a security deposit. This means that you can take advantage of even the smallest movements in currencies by controlling more money in the market than you have in your account. On the other hand, leverage can significantly increase your losses. Trading foreign exchange with any level of leverage may not be suitable for all investors.
The specific amount that you are required to put aside to hold a position is referred to as your margin requirement. Margin can be thought of as a good faith deposit required to maintain open positions. This is not a fee or a transaction cost, it is simply a portion of your account equity set aside and allocated as a margin deposit.
A Margin FX Transaction is
a FX Transaction with the following features:
The foreign exchange market is unique because of the following characteristics:
- Huge trading volume, representing the largest asset class in the world, leading to high liquidity;
- Geographical dispersion;
- Non-stop operation. 24 hours a day except weekends, i.e., trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York);
- The variety of factors that affect exchange rates;
- The low margins of relative profit compared with other markets of fixed income;
- The use of leverage to enhance profit and loss margins and with respect to account size.
Features and benefits of trading Margin FX Transactions
As Margin FX Transactions are leveraged, when you trade foreign currencies, you can potentially benefit from movements in the price of the underlying currencies without having to pay the full price of the currencies (i.e. the amount that you would be required to pay if you were to physically hold the currencies). You can effectively take a position with the same result as purchasing or selling a currency for less outlay than the equivalent physical transaction and still potentially benefit from a price move. Leverage is the ability to make a higher return for a smaller initial outlay.
Margin FX Transactions can be used as a risk management tool to help you hedge (protect) your assets from a change in the value of currency in which assets may be held.
The flexibility of entering and exiting currency markets enables you to keep an eye on currency market movements and trade accordingly. You are able to develop strategies regardless of the direction of currency markets. You also have the ability to create both long (where you buy a currency) and short (where you sell a currency) positions.
Margin FX trading does not require a rising currency market to make money. There is the potential for profit and loss in both rising and falling currency markets depending on the strategy you have employed. Currency markets are open to many changes and influences in normal market conditions and will reflect these unforeseen events with what is commonly referred to as market volatility.
If you are considering entering into Margin FX Transactions, you should be a person who:
has an appetite and tolerance for products which carry a high level of risk; and
fully understands the risks involved in trading Margin FX Transactions; and
is able to actively and continually monitor your Margin FX Transactions and meet your Obligations to SPL.
What are the potential profits and losses that I can make from trading Margin FX Transactions?
Margin FX Transactions can be used for hedging or speculation and give the potential for profit and loss in both rising and falling currency markets depending on the strategy that you apply.
Buying a currency creates a long position in that currency, whereas selling a currency creates a short position in that currency. Generally, when you are long, appreciation in the currency may give rise to a gain, while depreciation in the currency may give rise to a loss; when you are short, depreciation may give rise to a gain, whereas appreciation may give rise to a loss.
In addition to the loss or gain resulting from changes in the currency rate, you may also incur/receive a Funding Cost/Benefit when the Margin FX Transaction is Rolled. The Funding Cost/Benefit will depend on the interest rate differential between the two currencies in the Currency Pair of the Margin FX Transaction. Whether you incur a cost or receive a benefit will depend on whether you are long or short and also which currency has the higher yield (i.e. interest rate).
What are the risks of trading Margin FX Transactions?
Trading Margin FX Transactions can have significant risks and consequences.
Your level of exposure will depend on a number of factors, including (but not limited to):
1. your trading strategy;
2. the Currency Pair that you select;
3. interest rates
4. financial market conditions
How to Trade Forex
Opportunities in Forex: What's your opinion?
Just like stocks, you can trade currency based on what you think its value is (or where it's headed). But the big difference with forex is that you can trade up or down easily. If you think a currency will increase in value, you can buy it. If you think it will decrease, you can sell it. With a market this size, finding a buyer when you're selling and a seller when you're buying is much easier than in other markets, subject to available liquidity.
Maybe you hear on the news that China is devaluing its currency to draw more foreign business into its country. If you think that trend will continue, you could make a forex trade by selling the Chinese currency against another currency, say, the US dollar. The more the Chinese currency devalues against the US dollar, the higher your profits. If the Chinese currency increases in value while you have your sell position open, then your losses increase and you'd want to get out of the trade.
Making a trade: how to buy and sell currency
You have an idea. Now what? Open your free forex demo platform and trade your ideas.
All forex trades involve two currencies because you're betting on the value of a currency against another. Think of EUR/USD, the most-traded currency pair in the world. EUR, the first currency in the pair, is the base, and USD, the second, is the counter. When you see a price quoted on your platform, that price is how much one euro is worth in US dollars. You always see two prices because one is the buying price and the other one is the selling price. The difference between the two is the spread. When you choose to buy or sell, you are buying or selling the first currency in the pair.
Let's say you think the euro will increase in value against the US dollar. Your pair is EUR/USD. Since the euro is the first, if you think it will go up, you buy EUR/USD. If you think the euro will drop in value against the US dollar, you sell EUR/USD.
If the EUR/USD buying price is 0.70644 and the selling price is 0.70640, then the spread is 0.4 pips. If the trade moves in your favour (or against you), then, once you cover the spread, you could make a profit (or loss) on your trade.
fractions of a penny: trading on margin
If prices are quoted to the hundredths of cents, how can you see any significant return on your investment when you trade forex? The answer is leverage.
When you trade forex, you're effectively borrowing the first currency in the pair to buy or sell the second currency. With a $5-trillion-a-day market, the liquidity is so deep that liquidity providers—the big banks, basically—allow you to trade with leverage. To trade with leverage, you simply set aside the required margin for your trading size. If you're trading 50:1 leverage, for example, you can trade $1,000 in the market while only setting aside $20 in margin in your trading account. This gives you much more
exposure, while keeping your capital investment down.
But leverage doesn't just increase your profit potential. It can also increase your losses, which can exceed deposited funds. When you're new to forex, you should always start trading small with lower leverage ratios, until you feel comfortable with the market.
Why Trade with SP?
Because we're a leading forex provider in NZ, when you trade with SPL, you gain access to benefits only a top broker can provide. You enjoy:
Award-Winning Customer Service: Get 24/5 service whenever you need it, wherever you are.
Acclaimed Execution: Our innovative No Dealing Desk model offers competitive spreads and anonymous execution.
Free Premier Education: With on-demand lessons, webinars and real-time instruction, you get the trading edge you need.