forex trading basics

The global foreign exchange market is the biggest market in the world.The 3.2 trillion USD daily turnover dwarfs the combined turnover ofall the world's stock and bond markets.
There are many reasons for the popularity of foreign exchange trading,but among the most important are the leverage available, the highliquidity 24 hours a day and the very low dealing costs associatedwith trading.
Of course many commercial organisations participate purely due to thecurrency exposures created by their import and export activities, butthe main part of the turnover is accounted for by financialinstitutions. Investing in foreign exchange remains predominantly thedomain of the big professional players in the market - funds, banksand brokers. Nevertheless, any investor with the necessary knowledgeof the market's functions can benefit from the advantages statedabove.
In the following article, we would like to introduce you to some ofthe basic concepts of foreign exchange trading. If you would like anyfurther information, we suggest that you sign up for a FREE Membershipon this website, where you will be able to exchange views with otherForex traders and get answers to any questions you might have.
Margin Trading
Foreign exchange is normally traded on margin. A relatively smalldeposit can control much larger positions in the market. For tradingthe main currencies, Saxo Bank requires a 1% margin deposit. Thismeans that in order to trade one million dollars, you need to placejust USD 10,000 by way of security.
In other words, you will have obtained a gearing of up to 100 times.This means that a change of, say 2%, in the underlying value of yourtrade will result in a 200% profit or loss on your deposit. See belowfor specific examples. As you can see, this calls for a verydisciplined approach to trading as both profit opportunities andpotential risks are very large indeed. Please refer to our page ForexRates & Conditions for current Spreads, Margins and Conditions.
Base Currency and Variable Currency
When you trade, you will always trade a combination of two currencies.For example, you will buy US dollars and sell euro. Or buy euro andsell Japanese yen, or any other combination of dozens of widely tradedcurrencies. But there is always a long (bought) and a short (sold)side to a trade, which means that you are speculating on the prospectof one of the currencies strengthening in relation to the other.
The trade currency is normally, but not always, the currency with thehighest value. When trading US dollars against Singapore dollars, thenormal way to trade is buying or selling a fixed amount of US dollars,i.e. USD 1,000,000. When closing the position, the opposite trade isdone, again USD 1,000,000. The profit or loss will be apparent in thechange of the amount of SGD credited and debited for the twotransactions. In other words, your profit or loss will be denominatedin SGD, which is known as the price currency. As part of our service,Saxo Bank will automatically exchange your profits and losses intoyour base currency if you require this.
Dealing Spread, but No Commissions
When trading foreign exchange, you are quoted a dealing spreadoffering you a buying and a selling level for your trade. Once youaccept the offered price and receive confirmation from our dealers,the trade is done. There is no need to call an exchange floor. Thereare no other time-consuming delays. This is possible due to livestreaming prices, which are also a great advantage in times offast-moving markets: You can see where the market is trading and youknow whether your orders are filled or not.
The dealing spread is typically 3-5 points in normal marketconditions. This means that you can sell US dollars against the euroat 1.7780 and buy at 1.7785. There are no further costs, commissionsor exchange fees.
This ensures that you can get in and out of your trades at very lowslippage and many traders are therefore active intra-day traders,given that a typical day in USDEUR presents price swings of 150-200points.
Spot and forward trading
When you trade foreign exchange you are normally quoted a spot price.This means that if you take no further steps, your trade will besettled after two business days. This ensures that your trades areundertaken subject to supervision by regulatory authorities for yourown protection and security. If you are a commercial customer, you mayneed to convert the currencies for international payments. If you arean investor, you will normally want to swap your trade forward to alater date. This can be undertaken on a daily basis or for a longerperiod at a time. Often investors will swap their trades forwardanywhere from a week or two up to several months depending on the timeframe of the investment.
Although a forward trade is for a future date, the position can beclosed out at any time - the closing part of the position is thenswapped forward to the same future value date.
Interest Rate Differentials
Different currencies pay different interest rates. This is one of themain driving forces behind foreign exchange trends. It is inherentlyattractive to be a buyer of a currency that pays a high interest ratewhile being short a currency that has a low interest rate.
Although such interest rate differentials may not appear very large,they are of great significance in a highly leveraged position. Forexample, the interest rate differential between the US dollar and theJapanese yen has been approximately 5% for several years. In aposition that can be supported by a 5% margin deposit, this results ina 100% profit on capital per annum when you buy the US dollar. Ofcourse, an even more important factor normally is the relative valueof the currencies, which changed 15% from low to high during 2005 –disregarding the interest rate differential. From a pure interest ratedifferential viewpoint, you have an advantage of 100% per annum inyour favour by being long US dollar and an initial disadvantage of thesame size by being short.Please refer to our page Forex Rates & Conditions for current Spreads,Margins and Conditions!
Such a situation clearly benefits the high interest rate currency andas result, the US dollar was in a strong bull market all through 2005.But it is by no means a certainty that the currency with the higherinterest rate will be strongest. If the reason for the high interestrate is runaway inflation, this may undermine confidence in thecurrency even more than the benefits perceived from the high interestrate.
Stop-loss discipline
As you can see from the description above, there are significantopportunities and risks in foreign exchange markets. Aggressivetraders might experience profit/loss swings of 20-30% daily. Thiscalls for strict stop-loss policies in positions that are movingagainst you.
Fortunately, there are no daily limits on foreign exchange trading andno restrictions on trading hours other than the weekend. This meansthat there will nearly always be an opportunity to react to moves inthe main currency markets and a low risk of getting caught without theopportunity of getting out. Of course, the market can move very fastand a stop-loss order is by no means a guarantee of getting out at thedesired level.
But the main risk is really an event over the weekend, where allmarkets are closed. This happens from time to time as many importantpolitical events, such as G7 meetings, are normally scheduled forweekends.
For speculative trading, we always recommend the placement ofprotective stop-lossorders. With Saxo Bank Internet Trading you caneasily place and change such orders while watching market developmentgraphically on your computer screen.

Unique Advantages not Found in Other Financial Markets

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FX Solutions was founded to provide individual foreign exchange traders with the same professional liquidity, execution, and trading functionality demanded by interbank traders. Our proprietary price discovery and risk management technologies offer individual traders liquidity, consistency, and execution stability in the fast-growing category of Forex.

Global Trading System (GTS)

Cutting-edge technologyGTS features a multitude of trading tools using technology developed by foreign exchange veterans. Comprehensive charting packageIncludes more than 150 fully customizable visual indicators to help traders recognize potential trading opportunities Price engine efficiencyOur proprietary price feed provides fixed spreads and consistently competitive pricing. Read more about our currency pairs and spreads.Automated executionMore than 99.18% of our orders are automatically executed. † Read more about our automated execution. Our support team is always availableSpeak to an experienced professional 24 hours a day from Sunday 17:15 to Friday 16:30 Eastern Time (US). Market News International news feedProvides real-time information on global current events that can affect the Forex market.

example

Take advantage of market movements by trading Forex and CFDs. Trading Forex and/or CFDs enables you to receive most of the benefits of owning a security without taking physical ownership of the underlying security. Any difference in the price between the time you buy the underlying security and the time you sell is settled in cash. The difference is your profit or loss

European Forex Trading

Traders continued to punish the greenback following yesterday¡¯s unprecedented rate cut by the FOMC to lower its key interest rate to a target range of 0 to 0.25%. The dollar plunged to a fresh 13-year low against the yen at 87.16 and a new two-month low versus the euro, losing nearly 5-big figures for its largest one-day decline to 1.4437.With the Japanese currency trading at its highest level in over a decade, markets will remain vigilant against possibly BoJ intervention. Government officials have offered conflicting sentiments with Chief Cabinet Secretary Kawamura expressing his desire for the Bank to Japan to take appropriate action to stem the currency¡¯s sharp gains. However, Japan¡¯s Finance Minister Nakagawa said intervening in the currency market was not a consideration at this point, suggesting the movements had not been too sharp. With trading volume likely to wind down over the coming holidays, we would not rule out the possibility for the Bank of Japan to step in during thinly traded markets to quickly move the dollar/yen pair back toward the 100-level.The dollar breached through several key support levels against the majors, suggesting the sell-off may pick up steam over the coming sessions. With thin markets expected over the coming weeks, we anticipate heightened volatility that could possibly send the euro toward 1.4865.

Forex Trading Systems

Please find collection of forex trading systems that achieved interesting results in the past and that are used by growing number of forex traders. Test the strategies on demo account first. Remember past results does not guarantee future performance.

Forex Trading - Currency Trading

The "Forex"is the abbreviated form of Foreign Exchange; it is also referred as the "Spot FX" market. In Forex trading, the currency of one nation is traded for that of another. Therefore, Forex trading is always traded in currency pairs. The most commonly traded currency pairs are traded against the US Dollar (USD). The major currency pairs are the Euro Dollar (EUR/USD); the British Pound (GBP/USD); the Japanese Yen (USD/JPY) and the Swiss Franc (USD/CHF).

Forex Trading

For whatever reason, US interest rates at the front of the curve have rallied sharply over the last couple of days from a low close to 60 bps last week. The US yield curve is flattening as yields at the long end of the curve were crushed over the last few weeks as Bernanke's promise to move into new hyper-expansive territory saw a massive rally in long bonds. Meanwhile, the German 2-year rates continue to fall, such that the German/US 2-year spread now stands at around 90 bps. This matches the lowest level of that spread since late October when the deleveraging panic has EURUSD probing below 1.2500. And yet here we stand at 1.4000. Another interesting development in recent weeks is that the German yield curve is steepening sharply over the last two weeks while the US yield curve has flattened - a highly unusual divergence that reflects the fact that the Fed has essentially reached the zero bound at the shortest end of the curve while the ECB still has a bit more room for stimulus via the rate mechanism (another 100 bps drop on the German 2-year seems reasonable in the coming months, which would drop the German/US spread to zero. The last time it was at zero was back in October of 2007, when EURUSD was trading around current levels. This shows that while the direction of the spread can be an interesting signal in the short term (theoretically pressuring EURUSD lower from here), its absolute level doesn't seem to have much significance in the bigger picture.USDCAD continues to push up against its 55-day moving average, which it has been doing for the last 5 days in a row without being able to close above it after dropping below early last week. The freefall in energy prices continues, with the February contract already having fallen 10 dollars from the highs early last week. This could continue to keep CAD on the ropes, though again, the pair needs to work its way back above 1.2300 and even 1.2500 to get out from under the shadow of the latest steep sell-off.GBP got whacked again yesterday by dovish comments from a BOE official, this time Gieve, the departing BOE deputy governor. He admitted that the bank failed to understand the seriousness of the crisis (admirable honesty, as few did...) He also stated that rates are a "blunt instrument" for managing the situation and argued for "new instruments which sit somewhere between interest rates...and individual supervision and regulation of individual banks." The market's interpretation of this is that the Bank is leaning toward the US Fed's model for dealing with the problem (hyper-expansive monetary policy, etc...), which could lead to a further pound devaluation. We think the pound is beginning to get a bit cheap vs. the Euro in the big picture, even as many are begin to call for parity. We suspect that EUR will be one of the big losers in the early part of the coming year if not for the full calendar year, as the market has failed to price in the EuroZone's potential for further weakness. Technically, we're not there yet for a EURGBP short, but options are always an option....Equities did crumble through short term support after trading heavy recently, but the sell-off so far doesn't look like a capitulation and we have to wonder about the potential for much volatility over the next couple of days in equities with holiday trading more or less the rule until the New Year since Christmas and New Years fall in the middle of the week. If equities try to find a little holiday cheer, we might expect USDJPY to continue to drift toward 91.00 and even higher as that pair still has plenty of room to continue to consolidate the recent sell-off. USDJPY managed to rise despite yesterday's equity sell-off.As always, beware that poor market liquidity can result in exaggerated moves if enough participants have a bone to pick, so we must remain on guard, especially in currencies with end of the month/year fixing and the low liquidity. EURUSD may remain capped around 1.4000/1.4100 for now, with support coming in at the recent 1.3830 low area and then possibly 1.3720, the 100-day moving average.

Currency market

Contracts on Forex market within the IFC Markets are performed due to SPOT conditions. A spot transaction is a straightforward (or outright) exchange of one currency for another. The spot rate is the current market price or 'cash' rate. Spot transactions do not require immediate settlement, or payment 'on the spot'. By convention, the settlement date, or value date, is the second business day after the deal date on which the transaction is made by the two parties.Posted by Obaid Ur Rehman.

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Trade on spreads as low as 1-2 pips, commission-free

Trade currencies and spot gold at FOREX.com. Dealing spreads are as low as 1-2 pips on the most widely traded currency pairs. As always, you pay no commissions at FOREX.com, only the bid/offer spread. And with our fractional pips, you gain an extra digit of precision so that you can take advantage of smaller price movements. Plus, you can enter orders at any price - even inside the spread - and trade around news events, major economic announcements and other times of high market volatility.

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At FOREX.com, we've always automated processing for all click & deal forex trades. When you click BUY or SELL, our systems perform a real time margin check and, if accepted, immediately respond with a trade confirmation. Why is this important to you? First, you benefit from an unbiased trading environment that is not subject to human intervention. Second, automated trade processing improves our efficiency, which lowers our overhead and allows us to pass along the saving to you in the form of tighter spreads.

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Advanced tools & research

Advanced tools & research As a FOREX.com client, you'll have access to a variety of resources and unique trading tools that can help you make more informed trading decisions. • Full suite of daily and weekly forex research. Whether you're interested in fundamental analysis or technical trading methods, you'll have access to a wide variety of institutional-grade Forex market analysis as a FOREX.com client. And, tune in to our Weekly Market Call for timely trading ideas and analysis from Brian Dolan, our Chief Currency Strategist. • ForexInsider streaming market commentary: Our exclusive FOREXInsider delivers actionable analysis of news, events and technical levels that impact currency prices, in real-time, to your trading platform. Updates are published as often as 20 times an hour, so that you can act instantly on new market intelligence. • FOREXCharts by eSignal: Access eSignal's professional level charting package with over 30 analytical tools and indicators, a complete selection of drawing tools, and choice of real-time data feed. Preview FOREXCharts by eSignal.

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During FOREX.com's trading hours, all stop and limit orders up to $2 million are guaranteed to be filled at your price. We understand that stop loss and limit orders are an important part of every trader's risk management strategy, and so we take this policy very seriously. This policy does not apply during major fundamental announcements, or outside FOREX.com's normal trading hours.

Negative account balance protection

At FOREX.com, your risk is only limited to funds on deposit. Our margin policy eliminates concerns about debit balances by guaranteeing that you will never owe more than you have in your account.

Support for automated (API) trade executions

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As a FOREX.com client or registered practice account user, you can access the currency markets via virtually any Internet-enabled wireless device. Keep on top of the market from anywhere – you can view real-time forex quotes, news and commentary, and charts and set rate alerts. You can also monitor your open positions, leave orders, even buy and sell at the market. There are no extra fees, and no special sign up. All you need is an Internet-enabled wireless device. Learn more about FOREXTrader.wireless.

FOREXTtrader chats

FOREX.com's currency charts combine a rich, intuitive interface with easy access to the tools and resources you demand for forex trading.Click here to enlargeTraders seeking a robust, yet easy-to use charting tool will find FOREXTrader Charts to be a comprehensive technical analysis package. A streamlined layout makes it easy to access commonly used features and indicators. Whether you use Stochastics, Bollinger Bands, Moving Averages or Fibonacci, you can find over 60 technical and line studies right within the charting application. Monitor currency trades and orders directly on the charts.Use the template saver to save your technical indicator setups and apply them to future charts.Get a closer look at the markets with FOREXTrader Tick Chart.Customize and save fonts, colors, indicator parameters, and more FOREXTrader Charts are available on the FOREXTrader Windows platform. To learn about forex charts available on FOREXTrader.java and FOREXTrader.web, click here.