Learning to trade in a new market is like learning to speak a new language. It's easier when you have a good vocabulary and understand some basic ideas and concepts. So let's start with the basics of forex trading before learning how to use the Trading Station.
WHAT IS FOREX?
Forex is a commonly used abbreviation for "foreign exchange". It typically describes the buying and selling of currency in the foreign exchange market, especially by investors and speculators. The familiar expression, "buy low and sell high," certainly applies to currency trading. A forex trader purchases currencies that are undervalued and sells currencies that are overvalued; just as stock trader purchases stock that is undervalued and sells stock that is overvalued.
WHAT ARE THE QUOTING CONVENTIONS OF FOREX?
3-letter symbols are commonly used to denote currencies such as USD for the US dollar and EUR for the Euro. The currencies available on the FXCM Asia Trading Station are:
|US dollar||USD||Canadian Dollar||CAD|
|European Euro||EUR||Australian Dollar||AUD|
|British Pound||GBP||New Zealand Dollar||NZD|
|Japanese Yen||JPY||Danish Krone||DKK|
|Swiss Franc||CHF||Hong Kong Dollar||HKD|
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the "basis" for the buy or the sell. For example, if you BUY or "GO LONG ON" EUR/USD you have bought Euros (and simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar. On the other hand if you thought that there were reasons that demand for dollars would rise compared to the Euro you would SELL or 'SHORT" EUR/USD (selling Euros for dollars).
HOW DO YOU READ A QUOTE?
Because you are always comparing one currency to another, forex is quoted in pairs. This may seem confusing at first, but it is actually pretty straightforward. For example, the EUR/USD at 1.4022 shows how much one euro (EUR) is worth in us dollars (USD).
WHAT IS A LOT?
A lot is the smallest trade size available. FXCM Asia accounts have a lot size of 1,000 units of currency. Account holders can however place trades of different sizes, so long as they are in increments of 1,000 units like, 2,000, 3,000, 15,000, 112,000 etc.
WHAT ARE SPREADS?
WHAT IS A PIP?
A pip is the unit used to count profit or loss. Most currency pairs, except Japanese yen pairs, are quoted to four decimal places. This fourth spot after the decimal point (at one 100th of a cent) is typically what one watches to count "pips". Every point that place moves is 1 pip of movement. For example, if the EUR/USD rises from 1.4022 to 1.4027, the EUR/USD has risen 5 pips.
WHAT IS LEVERAGE/MARGIN?
As mentioned before, all trades are executed using borrowed money. This allows you to take advantage of leverage. Leverage of 20:1 allows you to trade with $1,000 in the market by setting aside only $50 as a security deposit. This means that you can take advantage of even the smallest movements in currencies by controlling more money in the market than you have in your account. On the other hand, leverage can significantly increase your losses. Trading foreign exchange with any level of leverage may not be suitable for all investors.
The specific amount that you are required to put aside to hold a position is referred to as your margin requirement. Margin can be thought of as a good faith deposit required to maintain open positions. This is not a fee or a transaction cost, it is simply a portion of your account equity set aside and allocated as a margin deposit. Learn more about FXCM Asia's Margin Requirements.
Traders holding positions for more than one day will receive or pay the interest difference between the two currencies in the pair they are trading. For example, if the current interest rate in the UK is 2.5% and in the US it is 1.7%, then if a trader has bought GBP/USD he will receive rollover interest equivalent to a daily equivalent of the 0.8% difference. If he has sold GBP/USD he will have to pay a similar rate. Though daily interest is tiny, leverage* can make this interest significant. More on rollover
* Without proper risk management, this high degree of leverage can lead to large losses as well as gains.