FOREX TRADING

2011-10-26T20:38:00.001-07:00

What is
forex trading? According to An Introduction to Forex Trading by John Russel, Forex Trading is dealing in currencies from different countries against each other. It is the buying of one country's currency while simultaneously selling another country' currency.
According to Wikipedia, the free encyclopedia, the foreign exchange market ( forex, FX, or currency market ) is a global, worldwide decentralised financial market for trading currencies. Financial centres around the world function as anchors of trading between a wide range of different types of buyers and sellers of currencies around the clock, with exception of weekends. The foreign exchange market determines the relative values of different currencies.
The foreign exchange market facilitates international and investment by making currency conversion possible. For example, it enables a business in Kenya to import goods from United States and make payment in U.S. Dollars, even though ordinarily its income is in Kenya shillings. It also supports direct speculation on the change in interest rates in two currencies.
In a typical forex transaction, a person buys a certain amount of one currency by paying a certain amount of another currency.
The forex market is peculiar because of:-
- its huge trading volume representing the largest asset class in the world, leading to high liquidity:
- its geographical dispersion:
- its continuous operation: 24 hours a day except weekends. i.e. trading from 20.15 GMT on Sundays until 22.00 GMT on Fridays:
- its variety of factors that affect exchange rates:
- its low margins of relative profit compared with other markets of fixed income: and,
- its use of leverage to enhance profit and loss margins and with respect to account size. As such, it has been referred to as the market closest to the ideal perfect competition notwithstanding its interference by central banks.
According to the Bank fo International Settlements, as of April, 30th 2010, the average daily turnover in global forex market is estimated at $ 3.98 trillion, a growth of approximately 20% over $ 3.29 trillion daily volume as of April, 2007.

FOREX TERMINOLOGY
The following are some of the terms used in forex market parlace:
Spot Market - This term applies to the market for trading currencies.
Rollover - This situation happens when a trading transaction continues for more than two days, and the open position is automatically rolled over to the next day.
Exchange Rate - The value of one currency expressed in terms of the other.
Currency Pair - The two currencies that make an exchange rate. In a transaction, when one is bought, the other is simultaneously sold, and vice versa.
Base Currency - This refers to first currency in the pair. It is also the currency in which the trading account is denominated.
Counter Currency - The second currency in the pair. Sometimes it is also called, the terms currency.
Counterparty - One of the participants in a transaction.
Pip - The smallest movement of price in a currency.
Pip Value - This is the value of a pip. For example, the pip value for EUR/USD is always $10 for standard lots, $1 for mini-lots and $0.10 for micro lots.
Sell Quote/Bid Price - This is the price that is shown on the left and is the price at which the trader will sell the base currency. It is also known as the market maker's bid price. For example, if the EUR/USD quotes 1.4300/04, one can sell 1 Euro at a bid price of $1.4300.
Buy Quote/Ask Price/Offer Price - This price is diisplayed on the right and is the price at which to buy the base currency. It also known as the market maker's ask or offer price. If the EUR/USD quotes 1.4300/04, you can buy 1 Euro at the offer price of $1.4304.
Spread - This is the difference between the sell quote and the buy quote or the bid and the offer price. E.g. if EUR/USD quote reads 1.4300/04, the spread is the difference between 1.4300 and 1.4304 or 4 pips. It must be noted that for a break even to be achieved on a trade, a position must move in the direction of the trade by an amount equal to the spread.
Lot - the unit size of a transaction. One standard lot is equal 100,000 units of the base currency. One mini lot: 10,000 units and one micro lot: 1,000 units.
Standrad Account - This is opening a position with 100,000 units of the base currency. It should be noted that for EUR/USD quote, 1 pip = 0.0001. Therefoe, the pip value = $10.
Mini Account - This is trading with mini lots i.e 10,000 units of the base currency. Here the pip value is $1 for EUR/USD quote.
Micro Account - This invloves trading with micro lots i.e. 1,000 units of the base currency. The pip value being $0.10 for EUR/USD.
Margin - The equity required to open or maintain a position. Used margin is the amount which is being used to maintain an open position. Free margin is the amount that is available to open new positions. if you have $1,000 margin balance in your account, and 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 their account upto 100 times (1,000 is 1% of 100,000) or a leverage ratio of 100:1. Should a trader's account fall below the minimum amount required to maintain an open position, they will receive a "margin call" requesting them to either add more funds into their account or 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 each broker and could be 50% of the initial equity needed to open the trade.
Leverage - This refers to being able to gear up your account into a position far much greater than your total equity balance. Given that a trader has $1,000 of margin in their account, and opens a $100,000 position, they are leveraging their account by 100 times, or 100:1. Should they open a $200,000 position while having only $1,000 of margin in their account, their leverage is 200 times, or 200:1. To increase leverage magnifies both gains and losses. Leverage is in fact trading on borrowed funds and it has been described as a double edged sword. though high profits can be made with it, a slight move in the opposite direction will result into equally heavy losses.
Manual Execution - is when a trade is executed by dealer intervention.
Automatic Execution - When an order is executed automatically without the intervention or involvement of the dealer. It is also known as autotrading.
Slippage - This is the difference between the order price and the executed price, measured in pips. This happens in fast moving and volatile markets or where trades are executed manually.
Drawdown - The decline in account balance from peak to valley, measured until a new high is reached, usually reported in percentage terms.
Support - a technical price level where buyers outweigh sellers causing prices to bounce off a temporary price floor.
Resistance - a technical price level where sellers outweigh buyers, causing prices to bounce off a temporary price ceiling.

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