Forex Trading

 

"Forex" or "FX" refers to the foreign exchange market in which currencies of the world are traded. The buying and selling of currencies is a global, decentralised market which means that forex trades can happen anywhere and at any time. The foreign exchange market is the largest and most liquid of the world's financial markets, and with a daily turnover of over US$4 trillion it provides attractive trading conditions.

 

 

The foreign exchange market is also a continuous market, open 24 hours, five days a week with currencies traded in nine major financial centres around the world, across almost every time zone. There is no central marketplace for foreign exchange and when the trading day in the US ends, a new trading day begins in Hong Kong and Tokyo making the forex market an extremely active domain for over the counter (OTC) transactions.

 

Each forex transaction involves two different trades – the buying of one currency and the selling of another. Forex quotes are quoted as a combination of two currencies, known as a currency pair. They are quoted in this way because when you buy a currency, you are selling a different one as well. By purchasing a currency while the currency price is rising, a trader can take a profit from each forex transaction. The inverse also applies as an investor can incur a loss when the rates move against them. Due to the high liquidity of the foreign exchange market, margins are low and leverage is high.

 

Leverage

 

Leverage is a provision which allows a trader to trade a large amount, although a smaller balance is held in the trader’s margin account.

 

You only need to provide a certain percentage of the total turnover of the deposit, rather than the full amount according to your position. For example, to trade $100,000 of currency, with a margin of 1%, an investor will only have to deposit $1,000 into his or her margin account.

 

Although the ability to earn significant profits by using leverage is substantial, leverage can also greatly amplify the potential losses. New forex traders must be aware of the risks of trading, as well as the benefits. It is imperative that new investors in the forex market build knowledge and understanding before commencing trading.

 

Overnight Rate/Rollover

 

If a trader maintains an open foreign exchange position at the end of a trading day, the trader is likely to receive or pay an interest rate based on the currency rates of two different currencies. This process is called overnight interest rate calculation.

 

Overnight rate/rollover is the interest paid or earned for holding a position overnight. Each currency has an interest rate associated with it, and because forex is traded in pairs, every trade involves not only two different currencies, but their two different interest rates.

 

Forex trading example: Buy NZD/USD

 

 Contract for differences
MarketNZD/USD
Price0.7800/0.7803
TradeBuy 1 Lot at 0.7803(1 Lot = 100,000 NZD)
Margin1 Lot=100,000NZD,Margin = 1000 NZD
TrendNZD/USD rises over 100 pips
Price0.7903/0.7906
Close orderSell at 0.7903
Net profitNet profit = $1000 USD
0.7903- 0.7803 = 0.0100USD/NZD
1 Lot = 100,000 NZD
0.0100 USD/NZD x 100,000 NZD = 1000 USD
If...Market price drops 100 pip:
loss = 1000 USD