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Forex Education

Forex Education

Forex Education

Forex Education
Fundamentals

Forex or FX is an abbreviation of foreign exchange, they refer to trading in the foreign exchange market.

Currency pair consists of two currencies. Each currency is shown in three letters, such as USD/JPY, the left side is the base currency and the right side is the quote currency.

Foreign exchange is the simultaneous action of buying one currency while selling another. It is expected that its exchange rate in terms of another currency will rise or fall.

Trading forex is flexible. A laptop or smartphone with internet connection is all it takes to run a trading empire

Trading forex involves leverage and trade by using margin deposit, which can magnify profit, but it also increase the risk of loss.

Why Trade Forex?

24 hours of consecutive trading
The Forex market operates 24 hours a day, 5 and a half days a week and there is no trading over the weekend. Each day, forex market opens in New Zealand, followed by the markets of Sydney, Tokyo, London and New York. When one region’s market closes another opens, or has already opened. Traders can participate in trading from Monday morning to Saturday morning, providing convenient and flexible opportunities for traders who want to trade anytime and anywhere.

High Market liquidity and transparency

The FX market is the most liquid and transparent market in the world. High liquidity provides a volatility of price movements in the FX market while online trading provides high transparency to ensure that all prices offered are fair. The FX is traded globally by a large number of organizations and individuals including financial institutions, corporations, central banks, hedge fund firms, financial brokers and business organizations. The factors that affect the FX market are change in interest rate set by local central banks, stock market, economic environment, policy decisions, political influences and other major events, making FX market extremely difficult to be manipulated by certain groups of people.

Leverage

Leverage is another reason why you should trade Forex as traders can maximize the volumes of currency in a trade. You can use a small amount of margin funds for trading larger volumes of currency. If you are using a leverage ratio 50:1, it means you need to commit only US$ 1,000 for trading a currency equals in value to US$ 50,000. High leverage allows traders to increase return from the smallest moves in the market, but it is also true for the possibility of making a loss.

Trading FX anywhere, anytime

Trading FX does not require a specific trading venue like stock or futures, but is traded through an electronic network and platform between banks, businesses and individuals. All you need is a laptop or smartphone with internet connection and a trading account opened at a regulated forex broker to trade FX anywhere, anytime.

FX terms
Base vs Quote Currency
In forex, a currency pair is made of two currencies. Currency pairs are shown as XXX/YYY, such as EUR/USD. In this example, EUR is the “base currency” while USD is the “quoted/counter currency”.

Forex Quote

Direct Quote Cross Quote
Foreign currency/per unit = US Dollar /per unit Foreign X currency/per unit = Foreign Y currency/per unit
AUD/USDEUR/USDGBP/USD AUD/JPYGBP/JPYEUR/GBP

Exchange Rate

The exchange rate refers to the price of a country’s currency in terms of the currency of another country.

For example: EUR/USD = 1.23700

It means a basic currency unit (1 Euro) equals to US$ 1.23700, in other words, you have to pay US$1.23700in exchange for 1 Euro.

In the FX market, the exchange rate is usually shown in five digits (Japanese Yen is in two digits). For example, EUR0.9620、GBP1.5237、CHF1.5003、JPY 119.95. The minimum change in the exchange rate is called change in 1 point, such as: EUR 0.0001 、JPY 0.01 、GBP 0.0001 、CHF 0.0001.

Bid vs Ask

USD/CHF 1.0028 1.0031
Price Quoting Party BID (Buy) ASK (Sell)
Trader Sell Buy

here are two prices shown on the forex trading platform: Bid and Ask. The bid price is the price that the broker is willing to purchase the base currency in exchange for the quote currency, so investor will sell the currency pair at the bid price. The ask price is the price that which the party is required to sell the base currency (hence buy back the quote currency). Therefore, the ask price is the available price that investors will buy from the market. The party will always provide a bid price which is lower than the ask price. For example, if a trader is quoted USD/CHF at 1.0028/31, he has to buy USD at the Ask of 1.0031 or vice versa, sell USD at the Bid of 1.0028.

Pip

Pip is the measurement of the change in forex value. A pip is usually the last decimal point of a quotation. For most of the currency pairs, pip is the fourth decimal point. For example, if EUR/USD changes from 1.1158to 1.1159the 0.0001 USD rise in value is one pip. However, the pip is the second decimal point for pairs with Japanese Yen. For example, USD/JPY changes from 112.677to 112.676, it has dropped 1 pip in value.

Normally in trading platforms, the currency pairs will be quoted to five decimal places and the JPY pairs to three decimals places. For example, if GBP/JPY moves from 186.224to 186.225, the JPY moves up 1 fractional pip.

Spread

A spread is the difference between the bid and ask in currency pairs.  It is also the cost of opening and closing a trade. The spread can be calculated in this formula: Spread = Ask price – Bid price. If the market price of EUR/USD is 1.08650/1.08680, then the spread is 0.03 or 3 pips. In traders’ perspectives, the smaller pips the lower cost.

Lot

A Lot refers to the size or number of units in a trade. Basically, there are four commonly known lot sizes:

Standard Lot/1 Lot 100,000 unit of the quote currency
Mini Lots/0.1 Lot 10,000 unit of the quote currency
Micro Lots/0.01 Lot 1,000 unit of the quote currency
Nano Lots/0.001 Lot 100 unit of the quote currency

For example, if a trader sells US$100,000, then he sells a 100,000 units standard lot. A standard lot is also called a contract size.

Leverage

In leveraged forex, you can use a small amount of margin funds for trading larger volumes of currency. BYFX offers a maximum leverage of 100:1, which means that each US$ 1 in your margin account can leverage to US$100. For example, if you deposit $ 1,000 into your margin account, you can open a position up to $ 100,000. Please bear in mind, high leverage allows traders to increase return from the smallest moves in the market, however, it is also true for the possibility of making a loss.

Margin

Margin is the amount required to open and maintain a position in your trading account. This is not a charge or trading cost, but a portion of your net amount is assigned as a margin deposit.

  1. Initial margin

The initial margin is the amount required for opening positions. It is calculated as follows:

(Market price x contract size) / Leverage = Initial margin

For example, if you are trading 1 lot EUR/USD at market price 1.3266 and the leverage level is 20:1, the initial margin will be:

(1.3266 * 100,000)/ 20 = $ 6633

Leverage Contract size Margin(USD)
1:1 (100%) 1 Lot $100,000
20:1 (5%) 1 Lot $5,000
100:1 (1%) 1 Lot $1,000
  1. Maintenance margin and margin call

A maintenance margin is usually 3% of a contract. If the market goes unfavorable to your trade, the floating loss may cause the net equity to fall below the maintenance level. When the balance of your margin account falls below the minimum required level, a margin call will be triggered to notify you to fund the margin deposit to meet the level of original margin requirement. If you cannot fund your margin in time, your broker will liquidate your position without your consent.

 

  1. Free margin / Available margin

Free margin is the amount of funds for you to open additional positions.

Available margin = Equity – Used margin

Long vs Short position

In forex trading, a long position refers to purchasing a currency pair, which in fact means to buy the base currency and sell the quote currency. If you want to buy the currency, you expect the base currency price to rise and then sell it at a higher price. If you go for a short position, it actually means selling the base currency and buying the quote currency, you expect the base currency to fall and then buy it back at a lower price.

Rollover

If your position remains open after the end of the day’s trading session, you will earn or pay rollover rate for the overnight open positions. Each currency has its own interest rate. Each currency pair involves not only two different currencies, but also two different interest rates. If you bought a currency with an interest rate higher than the currency you sold, you will earn rollover interest. On the contrary, if you sold a currency with a higher interest rate higher than the currency you bought, you will have to pay the rollover interest.

For example, you went long AUD/USD, if the annual interest rate of Australian dollar is 5.54% and the US dollar is 1.09%, you will earn overnight interest. The annual interest rate is calculated as 5.54% – 1.09% = 4.45%. Contrarily, if you sell AUD/USD, you have to pay 4.45% rollover interest because you are paying a higher Australian dollar interest and earning a lower US dollar interest.

FundamentalsFX GlossariesProfit and loss calculationOrder typeFX analysis
Position

A position is the size of a forex trade. The standard unit of the FX contract is called “lot”, which can be broken down into standard lot, mini lot, micro lot. A standard lot is $100,000 base currency. For example, trading a standard lot of AUD/ USD means that to transfer $100,000 Australian dollars into US dollars; mini lot is equivalent to $10,000 base currency; micro lot is 1,000 base currency. Assuming you are currently bullishing 0.5 lots on the US dollar against the Swiss franc (USD/CHF), you will need $50,000 (0.5 * 100,000 = 50,000). However, in the actual trading, you can use leverage to reduce the payment of actual funds. If you use a 100:1 leverage ratio, you can open the position with only $ 500 (50,000/100).  The threshold of micro position is even lower. Trading 1 micro lot (0.01 lot) USD/JPY with 200:1 leverage ratio, the initial margin requirement is only US$5. When compare to other investing products, forex trading is very flexible.

Calculate profit and loss

US dollar =  the quote currency in a currency pair, e.g. EUR / USD, GBP / USD, AUD / USD and NZD / USD.

In forex trading, if the quote currency is in US dollar, 1 spread will be equal to US$10.

Example 1: EUR / USD 1.36615 / 1.36632

Open position price: 1.36632 Buy 1 lot EUR / USD

EUR / USD move up to 1.37882 / 1.37596

Close position price: 1.37882 Sell 1 lot EUR / USD

In this trade, pips gained: 1.37882-1.36632 = 0.01250, or 125 pips

Since the value of each pip is US$10, profit or loss is calculated as: $ 125 * $ 10 = $ 1250.

(Note: when you buy 1 lot, each pip value of $ 10, if you buy 5 lots, each pip will worth 10 * 5 = $ 50)

US dollar = the base currency in a currency pair e.g. USD / JPY, USD / CAD, USD / CHF.

If the base currency is in US dollar, the value of a pip does not usually fixed at US$ 10.

Example 2: USD / JPY 101.958 / 101.976

Open position price: 101.976 Buy 1 lot USD / JPY

USD / JPY move up to 102.676 / 102.688

Close position price: 102.676 Sell 1 lot EUR / USD

Pips moved: 102.676-101.976 = 0.700, or 70 pips

But at this time the 70 pips earned is in Japan yen, it needs to be converted into US dollars. Therefore, profit or loss is calculated as: (open price – open price) / open price X contract size:

(102.676-101.976) / 102.676 X 100,000 = US$681.75

Example 3: Liquidation

If you long 7 mini lots USD / JPY positions at the price 105.98, leverage is 1: 200, your account balance is $ 842.59.

If the price fell to 105.81, what is the profit or loss of your position? Will this position be liquidated?

Calculated as following steps:

Margin required: 10,000 x 7 x 105.98 / 200 / 105.98 = $ 350

Available Margin: 842.59 – $ 350 = $ 492.59

The value of a pip: 100 / 105.81 x 7 = 6.6156 (JPY mini lot = $ 100)

How many pips have been moved: 105.98 – 105.81 = 17 pips

Loss amount: 17 x 6.62 = $ 112.5

As your available margin is $ 492.59 and the loss of the position is only $ 112.5, your account will not be liquidated.

If the price move to 105.23, how is the position now?

Your position will be liquidated because it has fallen 75 pips or lost $ 498.91.

Example 4:

If you opened a mini account and made the following trades with a leverage of 1:50. Your account balance is $ 2,185.84.

Buy 3 lots EUR / USD at 1.5876

Sell 2 lots USD / JPY at 105.90

Buy 4 lots USD / CHF at 1.0142

The required margin for the above positions is: (30,000 x 1.5876 / 50) + (200 x 2) + (200 x 4) = $ 2,152.56

If EUR / USD fell 5 points, the USD / JPY fell 22 points, the USD / CHF fell 11 points, would the position be liquidated?

The profit and loss calculation of the above positions:

EUR / USD: $ 1 (per pip) x 5 x 3 = $ 15

USD / JPY: 100 (per pip) / 105.68 = – $ 0.946

$ 0.946 / pip x 22 pips = $ 20.82 / lot

$ 20.82 / lot x 2 lots = + $ 41.64

USD / CHF: 1 (per pip) / 1.0131 = $ 0.987

$ 0.987 / pip x 11 pips = $ 10.857 / lot

$ 10.857 / lot x 4 lots = – $ 43.43

$ 2185.84 – $ 2152.56 = $ 33.28 Available Margin

Loss amount: $ 15 + $ 43.43 = $ 58.43

Profit amount: $ 41.64

Net loss: 58.43 – 41.64 = $ 16.79

Account remaining $33.28 – $16.79 = $16.49

Although the position has not yet been liquidated, the trader should fund the margin account to increase the margin level in order to avoid liquidation.

* Please note that the above calculations did not involve the rollover interest and other transaction costs.

Rollover interest

The exchange rate refers to the price of a country’s currency in terms of the currency of another country.

For example: EUR/USD = 1.23700

It means a basic currency unit (1 Euro) equals to US$ 1.23700, in other words, you have to pay US$1.23700in exchange for 1 Euro.

In the FX market, the exchange rate is usually shown in five digits (Japanese Yen is in two digits). For example, EUR0.9620、GBP1.5237、CHF1.5003、JPY 119.95. The minimum change in the exchange rate is called change in 1 point, such as: EUR 0.0001 、JPY 0.01 、GBP 0.0001 、CHF 0.0001.

Bid vs Ask

USD/CHF 1.0028 1.0031
Price Quoting Party BID (Buy) ASK (Sell)
Trader Sell Buy

here are two prices shown on the forex trading platform: Bid and Ask. The bid price is the price that the broker is willing to purchase the base currency in exchange for the quote currency, so investor will sell the currency pair at the bid price. The ask price is the price that which the party is required to sell the base currency (hence buy back the quote currency). Therefore, the ask price is the available price that investors will buy from the market. The party will always provide a bid price which is lower than the ask price. For example, if a trader is quoted USD/CHF at 1.0028/31, he has to buy USD at the Ask of 1.0031 or vice versa, sell USD at the Bid of 1.0028.

Pip

Pip is the measurement of the change in forex value. A pip is usually the last decimal point of a quotation. For most of the currency pairs, pip is the fourth decimal point. For example, if EUR/USD changes from 1.1158to 1.1159the 0.0001 USD rise in value is one pip. However, the pip is the second decimal point for pairs with Japanese Yen. For example, USD/JPY changes from 112.677to 112.676, it has dropped 1 pip in value.

Normally in trading platforms, the currency pairs will be quoted to five decimal places and the JPY pairs to three decimals places. For example, if GBP/JPY moves from 186.224to 186.225, the JPY moves up 1 fractional pip.

Spread

A spread is the difference between the bid and ask in currency pairs.  It is also the cost of opening and closing a trade. The spread can be calculated in this formula: Spread = Ask price – Bid price. If the market price of EUR/USD is 1.08650/1.08680, then the spread is 0.03 or 3 pips. In traders’ perspectives, the smaller pips the lower cost.

Lot

A Lot refers to the size or number of units in a trade. Basically, there are four commonly known lot sizes:

Standard Lot/1 Lot 100,000 unit of the quote currency
Mini Lots/0.1 Lot 10,000 unit of the quote currency
Micro Lots/0.01 Lot 1,000 unit of the quote currency
Nano Lots/0.001 Lot 100 unit of the quote currency

For example, if a trader sells US$100,000, then he sells a 100,000 units standard lot. A standard lot is also called a contract size.

Leverage

In leveraged forex, you can use a small amount of margin funds for trading larger volumes of currency. BYFX offers a maximum leverage of 100:1, which means that each US$ 1 in your margin account can leverage to US$100. For example, if you deposit $ 1,000 into your margin account, you can open a position up to $ 100,000. Please bear in mind, high leverage allows traders to increase return from the smallest moves in the market, however, it is also true for the possibility of making a loss.

Margin

Margin is the amount required to open and maintain a position in your trading account. This is not a charge or trading cost, but a portion of your net amount is assigned as a margin deposit.

  1. Initial margin

The initial margin is the amount required for opening positions. It is calculated as follows:

(Market price x contract size) / Leverage = Initial margin

For example, if you are trading 1 lot EUR/USD at market price 1.3266 and the leverage level is 20:1, the initial margin will be:

(1.3266 * 100,000)/ 20 = $ 6633

Leverage Contract size Margin(USD)
1:1 (100%) 1 Lot $100,000
20:1 (5%) 1 Lot $5,000
100:1 (1%) 1 Lot $1,000
  1. Maintenance margin and margin call

A maintenance margin is usually 3% of a contract. If the market goes unfavorable to your trade, the floating loss may cause the net equity to fall below the maintenance level. When the balance of your margin account falls below the minimum required level, a margin call will be triggered to notify you to fund the margin deposit to meet the level of original margin requirement. If you cannot fund your margin in time, your broker will liquidate your position without your consent.

 

  1. Free margin / Available margin

Free margin is the amount of funds for you to open additional positions.

Available margin = Equity – Used margin

Long vs Short position

In forex trading, a long position refers to purchasing a currency pair, which in fact means to buy the base currency and sell the quote currency. If you want to buy the currency, you expect the base currency price to rise and then sell it at a higher price. If you go for a short position, it actually means selling the base currency and buying the quote currency, you expect the base currency to fall and then buy it back at a lower price.

Rollover

Rollover interest is an interest paid or earned by the overnight position. Each currency has its own interest rate, since forex trading involves a pair of currencies, so each deal involves not only two currencies, but also two different interest rates. You can earn rollover when the rate of currency you buy is higher than the rate of currency you sell. If you have a lower interest rate on the currency you are buying, you will be charged a rollover interest.

For example, when you buy AUD/USD, the current Australian dollar interest rate is 4.75% annually, the US dollar interest rate is 0.25% annually. You buy the higher interest rate currency, so you will earn overnight interest – the annual interest rate is calculated as: 4.75% – 0.25% = 4.5%. On the contrary, if you sell AUD/USD, you are selling the currency in higher interest rate, so you need to pay overnight interest – the annual interest rate is 4.5%.

Forex Order Types
Market orders

A market order is a basic and common order type that can be executed instantly in accordance with the market price. You can simply enter a new position to buy the currency pair by clicking the “buy button” or to sell them by clicking the “sell button” on your trading platform.

Limit Orders

If you want to place an automatically executed order to buy below the market or sell above the market at a certain price, you can set your limit entry order which sets you free from monitoring your position on a 24/7 basis.

For example, the current price of GBP/USD is 1.25570. You want to short the currency pair when the rate hits 1.25590. You can set a sell limit order at 1.25590. When the rate touches 1.25590, your order will be executed automatically. That way, you don’t have to pay full attention to the market all the time and you won’t miss the chance to place a buy/sell order in the fluctuated market.

Take Profit Orders
A take profit order is set to lock-in profits and the order will automatically close a position when predetermined price is hit.

For example, if you went long USD/JPY at 108.977 and you want to close the position when the rate hits 110.977, you can place this take-profit order at 110.977. When the price touches 110.977, the position will be closed automatically and your profit will be secured.

Stop Loss Orders

A stop loss order is useful for preventing extra losses if the market go against your position. For example, you went long USD/CHF at 1.0048. You can set a stop loss order at 1.0008 in order to prevent additional losses if the price goes against your expectation and drops down further. In this case, your stop loss order will be automatically executed if the price touches 1.0008 and close the position to limit the maximum loss for 40 pips.

One-Cancels-the-Other (OCO)

A one-cancels-the-other order (OCO) is a mixture of two orders, when one of the orders is executed the other is automatically cancelled. The OCO order normally combines a limited order and a stop-loss order.

For example, if the price of GBP/USD is 1.0910, you would like to place either a buy limit order at 1.0950 when it breakout the resistance level or a stop-loss order to sell it when it falls below 1.0860. If buy limit order is executed, the stop-loss order will be canceled and vice versa.

If / Then

If / Then orders involve two entry orders when the “then” order is placed only upon execution of the “if” order. For example, the current price of EUR/USD is 1.09334, a client placed an “if” limit order to buy EUR/USD at 1.08834 and a “then” order to stop loss at 1.08834. When the market rate of EUR/USD hits 1.08834, the “if” order will be executed and the “then” order will also be activated. If either one of the if/then orders being canceled, the other order will be canceled automatically.

If / Then OCO

If / Then OCO orders involve three entry orders when the “then OCO” order is placed only upon execution of the “if” order. For example, the current price of USD/JPY is 112.801, a client placed an “if” limit order to buy USD/JPY at 112.301 and a “then OCO” order to take profit at 113.101 and a stop-loss at 111.901. When the market rate of USD/JPY touches 112.301, the “if” order will be executed and one of the “then OCO” orders will also be activated. If a cancel is made for any part of the orders, it will automatically withdraw the other parts.

Good Till Cancelled Order (GTC)

A GTC order remains valid from day-to-day until it is cancelled by client. Normally, an order will be cancelled automatically at the end the day’s trading session. But with GTC orders, client’s order can be extended until the order is placed or cancelled by client.

Trailing Stop

A trailing stop is a type of stop loss order that automatically shadows the price movement and protects trades against fluctuated market. For example, you short USD/JPY at 90.80 with a trailing stop of 20 pips. In this trade, your stop loss is at 91.00. If the price goes favorable to you, your trailing stop would move down 20 pips automatically to a new trailing stop level. Return to the example, with a trailing stop of 20 pips, if USD/JPY hits 90.70, then your stop loss would move to 90.90.

Your position remains open with a new stop loss level when the market goes favorable to you, however, your position will be closed automatically if the price moves against you and hits your trailing stop price.

Forex analysis

Fundamental Analysis

Fundamental Analysis means using the current and the historical data such as the fundamental study of the overall economy and trade, supply and demand, government policies, natural weather and other factors that influence a country’s currency, as a proxy to predict the trend of currency rate and to plan trading strategy. There are a luxury amount of economic and political news published in the market every day, which also causing a direct impact to the currency rate. Therefore, traders should understand how to interpret the information and make use of it to help making a right trading decision.

Economic indicator is one of the main factors that affect the currency rate in fundamental analysis. The United States is the world’s largest economy and its economic performance has a great impact on the global economy. Therefor the national economic indicators in US are drawing most attentions from the world.

From the perspective of investors, implementing trading strategies relies on analyzing the results of previous data and make estimation on the coming results before the data releases out from the authority.

The followings are some of the economic indicators commonly used to predict the economy.

National Economic Policy

Economic policy refers to how a country manages trade, budget and monetary distribution. This is why the budgets of the world’s parliaments are important for individuals seeking to invest in the country’s currency. If the budget balance can be achieved, trade can be promoted and economic conditions can be improved, then the currency value will be increased further. If for any reason, the distribution of wealth and economic policies reflected in the budget does not fully fulfill expectations, the currency will depreciate in value.

Gross Domestic Product (GDP)

GDP is an indicator to measure the performance of a country’s economic activity. GDP is the sum of gross value generated by all resident producers in the economy including industry, agriculture, services, etc. It is calculated with deduction of imported production. The higher percentage of GDP shows the better economic development, exchange rate and interest rate.

Monetary Policy

The monetary policy controls money supply and sets interest rates which has the effect to stimulate or restrain the economy. If the economy slips into recession or yet to see a strong recovery, the inflation rate will become low. It defines a loose monetary policy for expanding money supply and lowering interest rates will be implemented by the central bank. However, contrary to the high inflation rate, the central bank will take tight monetary policy by reducing money supply and increasing interest rates to curb the inflation to curb inflation continues to rise. Whether it is to raise or decrease the interest rates, it aims to stabilize prices and economic development.

Surplus and deficit

The currencies with fewer deficits are relatively strong in the forex market. It means that these countries have good trade status and some even lend their funds to other countries.

Trade trends and levels

If a country is very active in trade, there will be larger demand for money. It will affect the currency pairs associated with it. A large number of trade also shows that the competitiveness of the market. It does not hinge solely on the currency competitiveness, but also the competitiveness of goods and stocks.

Inflation

If there’s inflation in a country, the consequences of it are the notable general rise in prices and the decreasing purchasing power in their currencies. If other circumstances remain unchanged, it will result in depreciation in domestic currencies against foreign currencies and causing a loss in foreign exchange rates.

Other economic indicators that affect the currency exchange rate include trade balance, budget, non-farm employment figures, first-time claims for unemployment, consumer confidence index, industrial production index, retail sales index, personal income and expenses and housing and construction figures.

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