Forex Basics
Access the world’s largest market and trade more than 60 currency pairs.
What is FOREX ?
The Foreign Exchange market, also referred to as "FOREX" or "Forex" or "Retail Forex" or "FX" or "Spot FX" or just "Spot" is the largest financial market in the world, with a volume of over $4 trillion a day. Historically, the Forex Interbank Market was not open to small speculators, only banks and large institutions would trade. With a previous minimum transaction size, and often stringent financial requirements, the small trader was excluded from participation in this market. Today, Market Maker Forex Clearing Merchants are allowed to break down the larger interbank units and offer small traders the opportunity to buy or sell any number of these smaller units (lots).The participants in the market are central and commercial banks, corporate, institutional investors, hedge funds and private institutions like you.
Commercial Banks play two roles in the Forex Market:
- They facilitate transactions between two parties. For example, two companies wishing to exchange different currencies would seek the help of a commercial bank.
- They speculate by buying and selling currencies. The banks take positions on certain currencies because they believe they will be worth more if, “long”, or less if, “short”, in the future.
What happens in the market?
- A market is a place where goods are traded. In the Forex market, the goods are referred to as the currencies of different countries (as well as gold and silver), for example, you might buy EURO with US dollar or you might sell Japanese yen for Canadian dollar.
- Of course you don’t have to purchase or sell actual, physical currency; you trade and work with your own base currency, and deal with any currency pair you wish to.
- A market is a place where goods are traded. In the Forex market, the goods are referred to as the currencies of different countries (as well as gold and silver), for example, you might buy EURO with US dollar or you might sell Japanese yen for Canadian dollar.
- Of course you don’t have to purchase or sell actual, physical currency; you trade and work with your own base currency, and deal with any currency pair you wish to.
- A market is a place where goods are traded. In the Forex market, the goods are referred to as the currencies of different countries (as well as gold and silver), for example, you might buy EURO with US dollar or you might sell Japanese yen for Canadian dollar.
- Of course you don’t have to purchase or sell actual, physical currency; you trade and work with your own base currency, and deal with any currency pair you wish to.
How risky is Forex trading? Example
- One cannot lose more than his actual investment (also called your margin). The profit you can take is unlimited but you can never lose more than your investment or margin. You are strictly advised to never risk more than you can afford to lose
How do I start trading?
- You must first register and then deposit the amount you wish to have in your margin account to invest. You can deposit the fund using BANK wire transfer process, once the fund has reached your trading account you are ready for trading
How do I monitor my Forex trading?
- Online, anywhere, anytime, you have full control to monitor your trading status, check scenario, change some terms in your Forex deals, close deals, or withdraw profits.
- With the advance in technology it’s now also available on your MOBILE PHONE.
What is Forex Trading? What is Forex Deal?
- The investor’s goal in Forex trading is to profit from foreign currency movements
- More than 95% of all Forex trading performed is for speculative purpose (e.g. profit from currency movement). The small percentage that remains is done through hedging and other activities.
Components Of Forex Trading
The Forex deal is a contract agreed upon between the trader and market maker. The contract is comprised of following components:
- The currency pairs
- The principal amount
- The rate
- The Forex deal, in this context, is therefore an obligation to buy and sell a specific amount of a particular pair currency at a pre-determined exchange rate.
Exchange rate
- Because currencies are traded in pairs and exchanged one against the other when traded, the rate at which they are exchanged are called exchange rate.
- The majority of currencies are traded against the US dollar. The four major currencies traded most frequently after the US dollar is EURO (EUR), JAPANESE YEN (YPY), BRITISH PUND/ GREAT BRITAIN (GBP), SWISS FRANC (CHF). These 5 currencies are traded or have captured most of the volume and so are known as “FAB FIVE”.
- The first currency in the exchange pair is referred to as the base currency. The second currency is the counter currency or quote currency. The counter or quote currency is the numerator in the ratio, and the base currency is the denominator.
- The exchange rate tells a buyer how much of the counter or quote currency must be paid to obtain one unit of the base currency. The exchange rate also tells a seller how much is received in the counter or quote currency when selling one unit of the base currency.
Example: Exchange rate of EURUSD is 1.3890. This specifies a buyer that 1.3890 USD must be paid to obtain 1 EUR
Spreads
It is the difference between Buy and sell, BID and ASK. In other words, we can say it is the difference between the purchase and the sell price at any given point of time.
Example: EURUSD currency rate is 1.3890-1.3892. Where in 1.3890 is the buy price and 1.3892 is the sell price. In general smaller spreads are better for Forex investors as they require a small movement in exchange rates in order to profit from a trade.
Price, Quote and indications
The price of a currency is called “THE QUOTE”
There are three kinds of quote in the market:
DIRECT QUOTE:
The price of 1 US dollar in terms of other currency e.g., Japanese yen, Canadian Dollar, etc.
INDIRECT QUOTE:
The price of 1 unit of currency in terms of US Dollar e.g. British pound, Euro
Cross Rates:
Any quote which is not against the US Dollar is called “cross”. For example: GBP/JPY is a cross rate
Example of how the GBP/JPY rate is calculated
- GBP/USD: 2.0000
- USD/JPY: 110.00
- SO GBP/JPY IS 2.0000 X 110.00= 220.00
Margin
Banks or other online trading platforms need collateral to ensure that the investor can pay in the event of the loss. The collateral is called the “margin”. And is also known as minimum security in the Forex market. In practice, it is a deposit to a trader’s account that is intended to cover any currency trading losses in the future.
Margin enables private investors to trade in markets that have high minimum units of trading by allowing traders to hold a much larger position than their actual account value. Margin trading also ensures the rate of profit, but similarly enhances the rate of loss, beyond that taken without leveraging.
Most trading platforms require a maintenance margin to be deposited by the trader parallel to the margin deposited for actual trades. The main reason for this is to ensure the necessary amount is available in the event of a ‘gap’ or ‘slippage’ in rates. Maintenance margin is also used to cover administrative costs.
Leveraged financing is a common practice in Forex trading, and allow traders to use credit, such as a trade purchased on margin, to maximize returns. Collateral for the loan/ leverage in the margined account is provided by the initial deposit. This can create an opportunity to control 100,000 USD for as low as 1,000 USD.
Spot transaction
A spot transaction is a straight forward exchange of one currency for another. The spot rate is the current market price, which is called the “benchmark price”. Spot transaction does not require immediate settlement of payment “on the spot”. The two day period provides time to confirm the agreement and to arrange the clearing and necessary debiting and crediting of bank accounts in various international locations.
Risk
Although Forex trading can lead to very profitable results; there are substantial risk involved; exchange rate risk, interest risk, credit risk and event risk. Approximately 80% of all currency transaction last a period of seven days or less, with more than 40% lasting fewer than 2 days. Given the extremely short life span of the typical trade, technical indicators heavily influence entry, exit and other placement decisions.
| Currency | PIP | Contract Size | Exchange Rate |
|---|---|---|---|
| EUR/USD | 0.0001 | 100000 | 1.1292 |
| GBP/USD | 0.0001 | 100000 | 1.6319 |
| USD/JPY | 0.01 | 100000 | 117.82 |
| USD/CHF | 0.0001 | 100000 | 1.3736 |
| AUD/USD | 0.0001 | 100000 | 0.658 |
| USD/CAD | 0.0001 | 100000 | 1.3793 |
Types of Orders and using them
Market Order
An order to buy or sell a currency at the current market price. When placing a market order, the currency trader specifies the currency pair he wants to buy or sell. (EUR/USD, USD/JPY, etc.) and the number of lots he is interested in buying or selling.
Limit Orders
An order to buy or sell currency at a specified price or better. Trader specifies currency and price.
Stop Orders
Order that is activated when a specified price is reached. A stop order becomes a regular market order when the exchange rate reaches a specified level. Stop orders can be used to enter the market on momentum or to limit the potential loss of a position. Protect a Position: A trader buys 100,000 (1 lot) of EUR/USD at 1.1305 in anticipation of an expected 80 pip rally in the Euro. In order to protect himself from an unmanageable loss, the trader places a stop loss order at 1.1285 (20 pips below the current price). This way, if the Euro drops instead of rises against the dollar, the trader's loss is limited to 20 pips or $200 in this example.
Buy on Momentum
Trader expects the USD to rally vs. the Japanese Yen, but is hesitant to enter a buy order because the USD/JPY is getting close to short term resistance at 118. The trader instead places a buy stop order 10 pips above the resistance level. His stop is thus placed at 118.10. Unless the USD/JPY goes to 118.10, the order won't be activated. By doing this, the trader is waiting for the USD/JPY resistance level to be broken before entering the position.
Trailing Stop Orders
Trailing stop orders can be placed below the current market value to allow profits to run. This is a great technique to use so that a trader does not sell too early into a rally, but at the same time protects himself from losing profits already gained. Example: A trader buys the USD/JPY at 118.10 and it rises to 119. The trader does not want to sell too early, but also does not want to lose the profit he has already gained. So, a trailing stop loss can be set at say 118.70. If the market continues to move up, the order will not be activated and the trader participates in the future gain. Trailing stop orders would then move up to lock in more gains. For example, if the market moved to 119.20, the trader can now move the stop to 119, protecting more gains and still not selling in case the position continues to climb. If the market moves down through the stop, the trade will be activated and the trader will keep the gain and exit the position.
OCO (One Cancel others)
An OCO order is the simultaneous placement of two linked orders above and below the current market price. If either one of the orders is executed in the specified time period, the remaining order will automatically be cancelled. Example: Price of the EUR/USD is at 1.1340. A trader wants to buy 200,000 (2 lots), if the rate breaks the resistance at 1.1395 or wants to sell short if the price breaks the support at 1.1300. The trader can then enter an OCO order made up of a buy stop order at 1.1405 (10 pips above the resistance) and a sell stop order at 1.1290 (10 pips below the support) if the EUR/USD breaks support and gets to 1.1290, the sell stop order will be executed and the buy stop order at 1.1405 will be cancelled. If instead, the EUR/USD breaks resistance and reaches 1.1405, the opposite will take place.
Contingent order
An 'If done' or 'Contingent order', for example, is linked to an existing pending order - most commonly a limit or stop order to open a position. The 'If Done' order would lie dormant until the initial stop or limit order had been filled, at which point it would kick into life as a pending order awaiting execution. For example, with a long position a stop-loss order would be placed below the market to limit the loss, and a limit order would be placed above the market to take profit. The effect of the OCO is that when one order is executed, the other is automatically cancelled. Some providers even offer the variation of an 'If Done OCO' order. This comes into play if the opening trade is made, setting both a stop and a limit to establish a price target with a maximum allowable loss.
Guaranteed Stops
Guaranteed stops are only available on certain indices and leading shares. They have an associated minimum stop level that may, for example, be no closer than 5% below the current share price. There is an additional fee levied for these orders that is really akin to an insurance premium. This is charged when the transaction is opened and will either take the form of extra commission or, in the case of an index, a premium on the spread. The margin requirement is also altered to reflect the amount that would be lost if the stop were triggered. Traders are left with the decision of whether the risk of an index or blue chip gapping past a normal stop justifies the extra cost.
Features of FX market
Today, the Forex market is a nonstop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are continually and simultaneously traded across local and global market. The value of traders' investment increases or decreases based on currency movement. Foreign exchange market conditions can change at any time in response to real time events.
The main attractions of short term currency trading in the eyes of an investor are:
- 24hrs trading, 5 days a week with nonstop access (24x7) to global Forex dealers
- An enormous liquid market , making it is easy to trade most currencies
- Volatile market offering profit opportunities
- Standard instruments for controlling risk exposure.
- The ability to profit in rising as well as falling market.
- Leverage trading with low margin requirement
- Many options for low commission trading.
Overview of FX markets
How a Forex system operates in real time?
Online foreign exchange trading occurs in real time. Exchange rates are constantly changing, in interval of seconds.
Quotes are accurate for the time they are displayed only.
At any moment a different rate may be quoted.
When a trader locks in a rate and executes a transaction, that transaction is immediately processed and the trade is immediately executed.
Up-to-date exchanges rate
As rate change so rapidly, any Forex software must display the most up-to date rates.
To accomplish this, the Forex software is continuously communicating with a remote server that provides the most current exchange rates.
The rates quoted, unlike trading bank exchange rates, are actual tradable rates; a trader may choose to lock in the rate only as long as it is displayed.
Trading online on Forex Platforms
The internet revolution causes a major change in the way Forex trading is conducted throughout the world.Until the advent of the internet – Forex age at the end of the 1990's, Forex trading was conducted via phone orders, posted through brokers or banks. Most of the trading could be executed only during business hours. The same was true for most activities related to Forex, such as making the deposit necessary for trading, not to maintain profit taking. The internet has radically altered the Forex market, enabling the clock trading and conveniences such as use of bank transfer for deposit of funds.
Training for the future
Understanding the nuances of the Forex market requires experience and training, but is critical to success. In fact on-going learning is important to the veteran trader as it is to the beginner. The foreign currency market is massive and the key to success is knowledge. Through training, observation and practice, you can learn how to identify and understand where the Forex market is going and what controls the market.
For as little as 50usd at risk per trade, you can start trading while learning in real time. We strongly recommend you to start with very small volume and depositing a fund to cover a series of trades.
Learn the basic of foreign exchange market, trading terminology and advanced technical analysis and how to develop successful trading strategies
The many available tools and strategies to train yourself
There are many free tools and resources available in the market, particularly online, among these, you will find;
- Charts: There are many different types of chart, start with simple chart. Try to identify trends and major changes and try to relate them to technical pattern as well as to macro events. Make an effort to identify the general magnitude of each change on the chart.
- News/ Breaking News: Keep abreast of world news. Read all the headlines particularly those directed related to Forex. Check the impact of such news if any on the charts.
- Forex Outlook: Read daily/weekly outlooks posted about Forex on general financial sites. Many include alerts to upcoming reports and events such as market indication and interest rate decision.
- Forecast: Read forecast, some of which are available free of charge. Bear in mind that forecasts and predictions are made by people, none of which can guarantee the occurrence of future events.
- Indices: Follow the indices of leading markets (Dow jones, Nasdaq, etc.).Compare them to the changes in the Forex market, as well as to changes in particular currency pairs.
- Economic Indicators: Pay attention to the release of economic indicators (for example- the monthly unemployment rate in the USA). Also try to find their impact on the market in general, and on specific currency pairs in particular.
- Seminars and Courses: Now a days there are many people providing Courses and seminars on Forex, Try to attend the seminars of Professional people and professional courses. The time duration for the seminar and courses should be a minimum of 1 month or so. Some seminars are offered free, often as part of client recruitment process by a given platform, many are nevertheless worth attending. Educational courses are offered online and by most post-secondary institutions
- Forex books: Read or even just browse. Many books are offered free, or as part of the service pack to the trader. For many, historical background and technical analysis are better covered in books than in educational seminars
- Internet forum / blogs Visit and participate in Forex forum. This gives you an opportunity to learn from the experience of others. Of course remember that some forum participants may be biased, promoting a given Forex platform or their own agenda.
What can you trade with Septa Fx?
Forex
Online foreign exchange trading is already one of the most popular financial markets to trade.
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Shares
Take position over 65+ shares across UK, US and European markets on popular shares.
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Indices
Trade on basket of top shares representing the performance of a country’s economy.
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Commodities
Trade price movements of precious metals (gold and silver) as an alternative investment option.
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