Foreign Exchange

Important: This page is part of archived content and may be outdated.

The current page related to forex exchange can be found under the forex trading section of the XM site.

Before you even get started with online forex trading or foreign exchange trading it is important to understand that you entering the worlds most developed financial marketplace as the forex market is an over the counter market in which trades are executed between two parties which are willing to sell and buy a currency respectively at a certain exchange ratio. Currencies in forex trading are always traded in pairs and they are also quoted in pairs with the rule being that the US Dollar is the base currency for all trades.

What this means is that the first currency in pair quote which as pre mentioned is predominantly the US Dollar will indicate how many units of the second currency quoted is needed in order to execute an order. There are surely exceptions of the rule that the US Dollar is the first currency in the pair as it can and might be substituted by the Euro.

During currency trading there is always a bid price and an ask price; the bid price is the price at which a trader is willing to sell a unit of the base currency in exchange for the secondary currency which will be quoted as a pair of the base currency. The ask price reflects the price at which a trader can buy a unit of the base currency.
An example can be explained as follows; if the quote for the exchange rate of the Euro/U.S. Dollar in the market is 1.2581/1.2585, this means that the trader can pay $1.2585 in order to buy one Euro (the base currency) and will receive $1.2581 if one Euro is sold. The BID price is lower than the ASK price and the difference or ‘spread’ between the two numbers is measured in ‘pips’ (4 pips in this case) and represents the profit of the dealing room.

The Foreign Exchange market possesses a great volume of information and detail. A beginner to Forex trading will feel lost and vulnerable if he/she entered the market with no previous research or knowledge about the industry. Throughout this article you will be provided with all the essential details and facts regarding Forex trading and the market. Hopefully by the end you will have the confidence and stamina to begin trading with a live Forex account.

Since the 90s, Forex trading has been available to regular retail traders. It has grown globally amongst traders to such an extent that Forex is now considered the most popular financial market on the planet. Here are some reasons as to why:

  • The Forex market operates nonstop throughout the week as it is a 24/5 service for traders.
  • The extreme liquidity of the market has resulted to up to $4 trillion of daily trading volume.
  • The market for currencies is global, enabling a trader to trade with any currency in the world at any time.
  • The market is constantly changing rapidly; enabling traders with an increased chance to make money.
  • Every trader is guarded with developed mechanisms that help to control risk.
  • Trading can occur on any given moment, whether it is a rising or falling trade.
  • The offer of high leverage enables traders to benefit from large volume trading.
  • Forex does not charge commission, only a spread fee charge.
  • There will always be someone ready to trade with you.

The foreign exchange market consists of many variables and factors that need to be understood and for Forex traders need to become familiarized with. A trader who is new to the Forex market may feel confused and frustrated with the volume of aspects that are involved with trading Forex. It is vital for you as a trader to read our guidelines thoroughly and study them extensively to prevent you from being put off trading Forex before you develop into a profitable trader. The Forex market has become a widely popular choice of financial investment and is now referred to as the largest and most liquid financial market in the world. Up to $4 trillion of daily trading volume has been estimated to go through the global Forex market, where that figure still continues to expand and increase to this day.

Forex involves building profits as well as managing your losses effectively. It is the process of a trader simultaneously buying a currency and selling of another currency. The Forex market involves trades which are executed between major banks, corporations, currency speculators and governments. Due to the high leverage Forex offers, there is a huge amount of risk involved. It may not necessarily suit all investors however if a trader learns the Forex market inside out he/she will be ready to enter the market and achieve profitable FX trades. In order for Forex traders to earn the best profits and the fewest losses, they must constantly observe and be able to identify the several major currencies and the relationship between them. There are many factors that can affect a currency’s value to increase or decrease, therefore understanding and having an ‘eye’ for such factors is vital in order for a trader to succeed with his/her trades.

The process of trading with Forex usually involves trading through a broker. Forex trading is the means of buying or selling a currency to exchange it with a more convenient, valuable currency in return. Every trade involves a currency pair, for example the British pound (GDP) and the US dollar (USD). The exchange rate of the two currencies stated in a currency pair or quote is expressed as a ratio, for instance EUR/USD = 1.3335. This example means that at any particular moment, the one Euro will be worth 1.3335 US dollars. The final digit (5) is called a ‘pip’. One pip difference is the lowest change a trader will see during his trades. Say for instance, the above example went from EUR/USD 1.3335 to EUR/USD 1.3338; there would have been a change of 3 pips.

If you anticipate that the EUR/USD value will decrease, you would need to trade the currency pair the other way round – buying USD and selling EUR.

Many factors affect the increase or decrease of a currency’s value. It could be gradual change overtime or it could be due to specific events in the market. It is important that as a trader you are aware of such factors. It is essential you try to research the possible circumstances that could affect either of your currency pair values to rise or fall. The trader should only be concerned with his/her currency pair, so for example the EUR/USD ratio, any market activity that affects either currency will in turn affect your potential profit or loss.

Trading Forex can only be properly carried out with the assistance of a reliable and working Forex trading system. Every trader must obtain a trading system in order to proceed successfully with his/her trading career. Each system is specially or individually designed for traders to identify and analyze trading signals. These signals are devised by expert traders who have the full familiarity with trends and are able to identify suitable signals as they arise.

Trading systems are made up of charts with trading signals. Trading signals present a change in a Forex rate or trend that determines a trader to buy or sell a currency at a particular moment in time. Traders have the choice of using manual trading systems or automated systems. This means you can either ‘set’ your trading system to identify the signals or you can use an automatic system where signals are triggered automatically. There are countless advertisements on the internet for Forex trading systems, it is advisable to consider and try out a few variations before sticking with one. The best way to do so is to use demo trading accounts which allow you to discover the system as well as the market and different trades. This enables you to settle on which trading system suits you best before actually opening a live account.

So how much capital does a trader require to proceed with Forex?

Generally, the minimum trading size to begin with in Forex trading is 100,000 units of a currency. This can be considered a standard lot in Forex. However the undertaking of enough research can land you a broker that demands a less initial investment as low as a couple of hundred dollars. For small traders using mini accounts, there is the option of studying ‘acciones trading Forex’ online. Every form of business involves a certain level of risk. Trading currencies in Forex does entail risk taking, however a trader must certify ways of minimising the risks of losses and misfortunes. No trader wants to suffer the disadvantages of Forex. The best way to develop a profitable trading career is by absorbing as much information as possible.

A trader that will be best equipped to not stumble upon any misfortunes during his/her trades is one that learns and becomes skilled enough for the Forex market beforehand. There are a number of Forex trading scams out there and it is critical to be fully aware of them. There are plenty of online tutorials or seminars that you can attend to gather some Forex knowledge. The internet has many Forex based forums and blogs where traders can discuss and query about trades and the industry. There will also be chances online where you find decent websites and guides to finding the best strategies and systems. Researching and studying before entering the market can guarantee you a less probable chance of losses and risks.

Another way of ensuring that you avoid the drawbacks of any trade is to define the maximum loss that can possibly take place when the market works against you. The only straight forward and simple way to begin trading with Forex is to firstly research and study efficiently on the internet. There is so much to learn and understand about Forex and the only way to succeed is to thoroughly comprehend and be familiar with the subject and how the industry operates. There is the opportunity to use demo accounts which is very beneficial for beginners who wish to understand the technical operations of Forex. A wide variety of brokers offer online assistance to help, guide and advise you on the tips for trading with Forex. Nothing other than comprehensive research, stamina, determination and patience will direct a trader into the realms of successful trading.

Leverage and Margin in Foreign Exchange

A basic and key characteristic of the forex market is its massively high liquidity which subsequently allows unlimited position sizes and in turn allows us to offer our customers financial leverage. We would like to note that it is important to appreciate and more over understand the fact that leveraging increases your risk at trading, but while any stock market can present a daily volatility of more than 10%, major currencies traded in the currency market typically have a significantly lower index of volatility which is much less than 1%. What this means is that in reality trading with leverage can enable you to experince gains much quicker with the help of relatively low volatility.

Foreign Exchange Costs and Forex Comissions

It only reasonable that as the forex market is a market with a major turnover, electronic trading and the use of the internet are only reasonable to have brought economies of scale as there is a major reduction is the bid offer spread which in forex is the equivalent to commissions at most forex brokers. Spreads for the majors remain very low, but they can present an increase as the liquity of one particular currency drops. The online forex market is classified to have the lowest overall commissions relative to trade size compared with other financial markets and this works out positively for retail traders trading currencies.

Although the terms forex, foreign exchange or fx as commonly abbreviated by more advanced traders have been assumed to come hand in hand with other forms of trading that have been made available due to the versatility and the offerings of the online forex market; foreign exchange from its nature refers to the practice of selling and buying one currency for another; these trades can be practiced for speculative reasons or as a business practice with the final goal being assuming a profit from the constant fluctuations the currency market involves.

All trades assumed in forex trading are spontaneous trades as they require that selling one currency and buying another are simultaneous actions. When placing an order to buy a currency you are setting yourself in the position of going long where when you are selling a particular currency you are going short of the currency that is noted first in a currency pair at exchange rates of the particular time.

Buying and Selling in the Foreign Exchange

Buying a particular currency in the foreign exchange means that an online forex trader just like you is longing the first base currency after he is shorting the current equivalent amount of the second currency. The exact opposite implies when selling a currency as selling implies shorting the first base currency for the equivalent of the second. When requesting to sell or buy a currency respectively you are in reality placing an order; an action you might have heard being called opening a trade.
Immediately after you have placed an order you will realize that your position is placed near to the decimal figure of zero (0) as the value of the base currency is nearly equal to the equivalent amount of the quote currency. When time goes by the real value of your position will present if it was a wise profitable choice; which is when you will have to make the choice to take a profit or stop a loss. After closing the position your respective figure of profit or loss will be calculated from the difference between, the exchange rate at the time you opened the trade until the time you decided to close the trade in the foreign exchange.