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01

What Is Forex?

Forex, also known as foreign exchange, FX or currency trading, is a global market where all the world’s currencies trade. The forex market is the largest market in the world with an average daily trading volume exceeding $5 trillion. All the world’s combined stock markets don’t even come close to this.

02

Forex terms to know

Exchange Rate

The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.

 

Pip

The smallest increment of price movement a currency can make. Also called point or points. For example, 1 pip for the EUR/USD = 0.0001 and 1 pip for the USD/JPY = 0.01.

 

Lot

A lot references the smallest available trade size that you can place when trading currency pairs on the forex market. Typically, brokers will refer to lots by increments of 1,000, or a micro lot. It is important to note that the lot size directly impacts and indicates the amount of risk you're taking.

 

Leverage

Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses.

 

To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000).

 

Margin

The deposit required to open or maintain a position. Margin can be either “free” or “used”. Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1.

 

If a trader’s account falls below the minimum amount required to maintain an open position, he will receive a “margin call” requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.

 

Spread

The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.


 

Cross rate

The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in. This phrase is also sometimes used to refer to currency quotes which do not involve the U.S. dollar, regardless of which country the quote is provided in.

For example, if an exchange rate between the British pound and the Japanese yen was quoted in an American newspaper, this would be considered a cross rate in this context, because neither the pound or the yen is the standard currency of the U.S. However, if the exchange rate between the pound and the U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate because the quote involves the U.S. official currency.

03

Forex vs. Stocks

Why Trade Forex
There are approximately 2,800 stocks listed on the New York Stock exchange. Another 3,100 are listed on the NASDAQ. Which one will you trade? Got the time to stay on top of so many companies? In spot currency trading, there are dozens of currencies traded, but the majority of market players trade the four major pairs. Aren’t four pairs much easier to keep an eye on than thousands of stocks? Look at Mr. Forex. He’s so confident and sexy. Mr. Stocks has no chance! That’s just one of the many advantages of the forex market over the stock markets.

Here are a few more:

24-Hour Market

The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 4:00 pm EST until Friday at 4:00 pm EST, with customer service usually available 24/7.

 

With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.
 

Minimal or No Commissions

Most forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone.

 

Combined with the tight, consistent, and fully transparent spread, forex trading costs are lower than those of any other market.


Most brokers are compensated for their services through the bid/ask spread.


 

Instant Execution of Market Orders

Your trades are instantly executed under normal market conditions. Under these conditions, usually the price shown when you execute your market order is the price you get.

 

You’re able to execute directly off real-time streaming prices (Oh yeeeaah! Big time!).

 

Keep in mind that many brokers only guarantee stop, limit, and entry orders under normal market conditions. Trading during a massive alien invasion from outer space would not fall under “normal market” conditions.

 

Fills are instantaneous most of the time, but under extraordinarily volatile market conditions, like during Martian attacks, order execution may experience delays.


 

Short-Selling without an Uptick

Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or whichever way the market is moving.

 

Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. So you always have equal access to trade in a rising or falling market.


 

No Middlemen

Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen.

 

Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees.

 

Spot currency trading, on the other hand, is decentralized, which means quotes can vary from different currency dealers.

 

Competition between them is so fierce that you are almost always assured that you get the best deals. Forex traders get quicker access and cheaper costs.


 

Buy/Sell programs do not control the market.

How many times have you heard that “Fund A” was selling “X” or buying “Z”? The stock market is very susceptible to large fund buying and selling.

 

In spot trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small.

 

Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.

04

Metatrader

Why Trade Forex
There are approximately 2,800 stocks listed on the New York Stock exchange. Another 3,100 are listed on the NASDAQ. Which one will you trade? Got the time to stay on top of so many companies? In spot currency trading, there are dozens of currencies traded, but the majority of market players trade the four major pairs. Aren’t four pairs much easier to keep an eye on than thousands of stocks? Look at Mr. Forex. He’s so confident and sexy. Mr. Stocks has no chance! That’s just one of the many advantages of the forex market over the stock markets.

Here are a few more:

24-Hour Market

The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 4:00 pm EST until Friday at 4:00 pm EST, with customer service usually available 24/7.

 

With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.
 

Minimal or No Commissions

Most forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone.

 

Combined with the tight, consistent, and fully transparent spread, forex trading costs are lower than those of any other market.


Most brokers are compensated for their services through the bid/ask spread.


 

Instant Execution of Market Orders

Your trades are instantly executed under normal market conditions. Under these conditions, usually the price shown when you execute your market order is the price you get.

 

You’re able to execute directly off real-time streaming prices (Oh yeeeaah! Big time!).

 

Keep in mind that many brokers only guarantee stop, limit, and entry orders under normal market conditions. Trading during a massive alien invasion from outer space would not fall under “normal market” conditions.

 

Fills are instantaneous most of the time, but under extraordinarily volatile market conditions, like during Martian attacks, order execution may experience delays.


 

Short-Selling without an Uptick

Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or whichever way the market is moving.

 

Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. So you always have equal access to trade in a rising or falling market.


 

No Middlemen

Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen.

 

Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees.

 

Spot currency trading, on the other hand, is decentralized, which means quotes can vary from different currency dealers.

 

Competition between them is so fierce that you are almost always assured that you get the best deals. Forex traders get quicker access and cheaper costs.


 

Buy/Sell programs do not control the market.

How many times have you heard that “Fund A” was selling “X” or buying “Z”? The stock market is very susceptible to large fund buying and selling.

 

In spot trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small.

 

Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.