What is Forex?

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Overview of Forex

What is Foreign Exchange?

Foreign exchange, commonly known as 'Forex' or 'FX', is the exchange of one currency for another at an agreed exchange price on the over-the-counter (OTC) market. All forex is quoted in terms of one currency versus another. Each currency pair has a 'base' currency and a 'counter' currency. The base currency is the currency on the left of the currency pair and the counter currency is on the right. For example, in EUR/USD, EUR is the 'base' currency and USD the 'counter' currency. Forex is the world's largest financial market, with an average volume of US$ 4 trillion per day. Compare this to the New York Stock Exchange, which has a daily turnover of US$50 billion, and it's easy to see how the worldwide forex market is the biggest financial market in the world.

Commonly traded currencies in the FX market

Symbol Currency
USD United States Dollar
EUR Euro (EUR/USD)
JPY Japanese Yen (USD/JPY)
GBP British Pound or Sterling (GBP/USD, or STG/USD)
CHF Swiss Franc (USD/CHF)
CAD Canadian Dollar (USD/CAD)
AUD Australian Dollar (AUD/USD)
NZD New Zealand Dollar (NZD/USD)

How does the Forex market operates?

Unlike other financial markets like the New York Stock Exchange, the forex market has neither a physical location nor a central exchange. The forex market is considered an Over-the-Counter (OTC), or "Interbank" market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period, traded globally by a large number of individuals and organizations. At 5:00 pm EST Sunday, trading begins as markets open in Sydney. At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST. And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST. Before New York trading closes, the Sydney market is back open – it's a 24-hour seamless market!

What is FX Pricing?

FX markets and prices are mainly influenced by international trade and investment flows. To a lesser extent, FX prices are also influenced by economic and political conditions, such as interest rates, inflation, and political instability (the same factors that influence the equity and bond markets). This means that currency prices are constantly fluctuating in value against each other, offering multiple trading opportunities.

What makes FX attractive?

Economic and political conditions usually have only a short-term impact, which makes FX attractive as it offers some of the diversification necessary to protect against adverse movements in the equity and bond markets.

How to Trade Forex?

When trading forex prices, you would buy a currency pair if you believed that the base currency will strengthen against the counter currency. Alternatively, you would sell a currency pair if you believed that the base currency will weaken in value against the counter currency.

Forex trading allows you to speculate on price movements in the global currency market. Currency values rise and fall in relation to each other and in response to national and international economic, financial and political events. There is no difference in profit or loss potential if a currency rises or falls in relation to its trading partners so you can as readily sell a currency as you can buy it.

The first currency in any pair, for example EUR/USD or USD/CHF is the base currency. Trades and positions are calculated in that currency. For EUR/USD trades are made in euros but for USD/CHF, trades are conducted in US dollars.

Forex is a leveraged product enabling you to trade by paying a small fraction of the equity that would be needed to fund a trade. This means that you can potentially magnify your returns on an investment. Remember though that higher leverage can result in losses that exceed your initial deposit.

Getting Started with FX

What is Bid, Ask and Spread?

All FX prices, or quotes, include a 'Bid' and 'Ask' similar to other financial products. Bid is the price at which you can sell currency. Ask is the price at which you can buy currency. The difference in the BID/ASK of the currency pairs is referred to as the 'spread'. An example would be EUR/USD dealing at 1.41800/1.41808 (in this case the spread is 0.8 pips or 0.00008). The exceptions to this are the JPY pairs which are quoted to just 2 decimal places. A USD/JPY price of 76.41/76.44 displays a 3 pip 'spread'.

How to calculate Point or 'pip'?

Pip stands for Percentage in Points. Most of our currency pairs are quoted to 5 decimal places with the change from the 4th decimal place (0.0001) in price commonly referred to as a 'pip'. For example, if the price of the EUR/USD forex pair moved from 1.41800 to 1.41920, it is said to have climbed by 12 'pips' (92-80=12). The exceptions to this are the JPY pairs which are quoted to just 2 decimal places (0.01).

How to predict the FX market movements?

Regarding predicting the movements of the FX market, traders are usually divided into two camps, technical analysis and fundamental analysis. Traders who use technical analysis uses charts, trend lines, support / resistance levels, mathematical models to identify opportunities and to make trading decisions. Traders who use fundamental analysis analyse the tendency of the economic indicators and market factors, such as GDP growth rate, inflation rate, interest rates and so on.

COST

Swaps

As this is a leveraged contract, you are effectively being lent money to open your position, outside of the initial deposit you’ve paid. If you want to hold your position overnight, you will be charged a small fee to cover the cost of money you’ve effectively borrowed. Please visit the Overnight Funding page under the Trading tab for more information.

Commissions

We charge a commission, as low as USD 5 per standard contract traded.

Example:

Commission on Forex positions are charged in USD. We will calculate your commission based on the total value of your trade in USD using current exchange rates.

Example 1:
You trade 6 EUR/USD contracts with a commission of USD 5 per standard contract. As your account is already denominated in USD, your commission charged will be:

USD 5/contract * 6 contracts = USD 30

Example 2:
You trade 2 mini EUR/USD contracts. Do keep in mind that for mini contracts, the commission charged will be USD 5/10 = USD 0.5 per mini contract instead. As your account is already denominated in USD, your commission charged will be:
USD 0.5 * 2 mini contracts = USD 1

FX Trading Examples

By trading any form of forex, you are trading based on the price differences of your buying and selling price. In forex trading, it works in a similar way. You are taking advantage of the movement of one currency against another in a currency pair, earning you a profit if you correctly predict the pair’s movement and a loss if you didn’t predict correctly.

Below are some in-depth examples that show you how forex trading works:

Trading a EUR/USD forex
The EUR/USD is trading at 1.20295, with a Bid price of 1.20289 and an Ask price of 1.20301, giving you a spread of 1.2 pips. You think that the Euro will gain value against the US dollar, so you decide to buy the EUR/USD contract at the market’s Ask price of 1.20301.

The size of a forex contract is measured in contracts, with each contract equal to a single lot of the base currency in the pair. In this case, buying 1 contract of EUR/USD is the equivalent of trading EUR 100,000 for USD 120,301. You decide to buy 5 contracts, giving you a total position size of USD 601,505. This means that you’ll earn USD 50 for every pip of movement.

To find out the value per pip in movement, you’ll need to multiply the value per pip by the number of contracts.

Forex is a leveraged product, so you do not have to pay the full value of the position upfront. EUR/USD has a minimum margin factor of 1%, so you will only need to commit USD 601,505 * 1% = USD 6,015.05.

If your prediction is correct
The Euro rises against the US dollar, and the EUR/USD is now trading at 1.20325, with a Bid price of 1.20319 and an Ask price of 1.20331. As you had initially bought, and are looking to sell to close, you will need to look at the Bid price. Hence, your profits are now (1.20319 – 1.20301) * value per pip = 1.8 pips * USD 50 = USD 90.

Remember that as you are trading FX, you will need to factor in the commission charges. Assuming a minimum commission of USD 5 per contract, your trade to open and close would be USD 5 * 5 contracts = USD 25. If you are closing your trade, your final profits would be: USD 90 – USD 25 = USD 65.

If your prediction is wrong
The Euro falls against the US dollar, and the EUR/USD is now trading at 1.20187, with a Bid price of 1.20181 and an Ask price of 1.20193. As you had initially bought, and are looking to sell to close, you will need to look at the Bid price. Hence, your losses are now (1.20181 – 1.20301) * value per pip = 12 pips * USD 50 = USD 600.

Remember that as you are trading FX, you will need to factor in the commission charges. Assuming a commission of USD 5 per contract, your total loss would be: USD 600 + USD 25 = USD 625

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