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Currency Forex Trade, Forex Trade, FX Trade – these are all terms used to describe the exchanging of one currency for another; for example, the exchanging of U.S. Dollars to British GBP Pounds. In the foreign exchange market, this is viewed as buying pounds while simultaneously selling US dollars. Because two currencies are always involved, currencies are traded in the form of currency pairs, with the pricing based on the exchange rate offered by dealers in forex trading market. Forex Trading Tutorial

*This refers to the foreign exchange market.  Trading of FxPremiere.com referred brokers product is a derivative and does not involve any transactions in the underlying instruments.

Introduction to the Capital Currency Market

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In order to exchange dollars for pounds, the actual transaction to meet this objective is to buy the GBP/USD currency pair. In this example, GBP is the ISO code for British Pounds, and USD is the ISO code for U.S. Dollars. Forex Trading Tutorial

Currency Trading Conventions

What You Need to Know before Trading

Before continuing, it is important to learn a few fundamental concepts. We will also expand on some of the topics you learned earlier as you prepare to make your first trade.

Trading in The Forex Spot Market

Role of the Forex Market Maker

  • Often referred to as a dealer or a broker, a forex market maker provides a two-way quote for each currency pair it offers.
  • A two-way quote consists of a bid price and an ask price, and represents the exchange rate at which the market maker is willing to buy or sell the currency pair.
  • The exchange rate as published by a forex broker, advertises the current rate at which you can trade (exchange) one currency for another.
  • If currency A is worth 1.25 of currency B for example, and you wanted to exchange 500 units of currency A, you would receive 625 units of currency B (500 × 1.25).
  • Looking at this the other way, if you instead needed 1200 units of currency B, but only had currency A, you would need to exchange 960 units of currency A to get the required amount of currency B (1200 ÷ 1.25).

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Spot Trade Settlement

  • Spot trades in the forex market are intended for immediate settlement. Forex Trading Tutorial
  • This means the trade is considered to have been completed (or executed) once the buyer and the seller agree to the terms of the trade.
  • The physical delivery of the currencies involved in the trade however, can take up to two days after the trade itself. This is the settlement date.
  • In the industry, this is referred to as “T+2” which stands for “trade day plus two days” for the settlement (the physical delivery of the currencies) to be completed.
  • T+2 is a throwback to the days when trading was conducted mostly using fax machines or over the telephone. While these methods allowed for instantaneous agreement between the trade participants, it could take several days for the actual transfer of funds between the buyer and seller accounts.

Buying and Selling Currency Pairs

  • The exchange rate describes the price for which the currency of a country can be exchanged for another country’s currency
  • For example, the most commonly-traded currency pair consists of the euro and the U.S. dollar. It is always listed as EUR/USD and never the reverse order.

What are Pips in Forex

Overview

  • Pip = “price interest point”.
  • A pip measures the amount of change in the exchange rate for a currency pair.
  • For currency pairs displayed to four decimal places, one pip is equal to 0.0001. Yen-based currency pairs are an exception and are displayed to only two decimal places (0.01).
  • Some brokers now offer fractional pips to provide an extra digit of precision when quoting exchange rates for certain currency pairs.
  • A fractional pip is equivalent to 1/10 of a pip.
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How to Close an Open Position in Forex

Overview

  • Active trades are referred to as open positions.
  • Open positions remain subject to fluctuations in the exchange rate. Forex Trading Tutorial
  • Open positions are closed by entering into a trade that takes the opposite position to the original trade.
  • The net effect is to bring the total amount for the currency pair derivative back to zero. Forex Trading Tutorial
  • Read more on Forex Signals Learning

Realizing Gains / Losses

  • It is important to understand that gains or losses for open positions are still unrealized.
  • Only when you close a position do you actually realize the gains or losses for the trade, thereby affecting the actual cash balance of your account.

Closing a Long Position

  • To close a long position, you must sell an equal amount of the same currency pair.
  • For instance, if you are long $100,000 EUR/USD, you need to sell $100,000 EUR/USD back into the market to reduce your EUR/USD holdings to zero.
  • If you receive more when you sell than you paid to buy the order, you earn a profit. If you receive less, you realize a loss.

Closing a Short Position

  • A short position is the opposite of a long position – think of it as holding a negative amount of a currency pair derivative.
  • In order to close a short position, you need to buy enough of the currency pair derivative to bring your position back to zero.
  • For instance, if you are short $100,000 EUR/USD, then you must buy $100,000 EUR/USD to close the short position. If you can buy this back for less than you earned when you sold it originally, the difference is retained as profit.

Partial Position Close

  • It is possible to partially close an open position by only selling or buying enough to partly offset the open position.
  • For example, selling only $75,000 when you have an open position of $100,000 EUR/USD, closes three-quarters of the original position, leaving an open EUR/USD position of $25,000. Forex Trading Tutorial

What are End-of-Day Rollovers in Forex Forex Trading Tutorial

Overview

  • Rollovers are necessary to determine a daily valuation for open transactions in order to calculate finance charges for the positions.
  • When trading in a margin account, you receive finance credits on your long positions, while paying finance charges on short positions.
  • Most brokers perform the rollover automatically by closing open positions at the end of the day, while simultaneously opening an identical position for the following business day. This is also known as a “tomorrow next” transaction, or simply a “tom next”.
  • Intra-day trades are not included in the finance charge calculation for those brokers who use rollovers in this manner. If you open and close a trade within the same day and do not hold it open at the time your broker performs the end of day valuation, the trade has no finance charges implications.At the time of this writing, OANDA is the only forex broker to offer second-by-second finance charge calculation. This means that finance charges are calculated for all open positions for the entire time your position is open. This eliminates the need for an end-of-day rollover swap transaction.

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Currency Trading Conventions

  • In this case, EUR is the base currency and USD is the quote or counter currency.
  • “Pip” stands for “price interest point” and is equal to 0.01 for exchange rates expressed to two decimal places. For rates expressed to four decimal places, one pip is equal to 0.0001.
  • Some brokers offer an additional digit of precision for certain exchange rates. This extra digit is commonly referred to as a “fractional pip”.
  • Buy = to take a long position. Sell = to take a short position. Forex Trading Tutorial
  • To close a position, you need to buy or sell an equal amount of the open order, thereby reducing the open position to zero.
  • LEARN HOW TO TRADE – Browse and read our comprehensive forex learning guides. To help you get started with trading forex signals. Grow your Forex Signals Learning knowledge on the capital markets.

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Evolution of an Open Forex Market

Why We Have Richard Nixon to Thank

  • It did not take long for cracks to appear in the Bretton Woods Accord. Forex Trading Tutorial
  • For the pegged currencies, it was impossible for individual countries to manage the value of their own currency.
  • Likewise, the value of the dollar itself was subject to fluctuations in the price of gold.
  • As resistance grew to the restrictions imposed by the original agreement, two events in particular would spell the end of the Bretton Woods Agreement.

History of the Forex Market Forex Trading Tutorial

Pegging U.S. Currencies to the U.S. Dollar

  • By pegging (or linking) these currencies directly to the dollar, the value of the pegged currencies remained dependent on the value of the dollar.

Forex Training Summary and Quiz

Introduction to Currency Trading

  • The earliest form of currency trading was mostly for the facilitation of international commerce.
  • In 1971, U.S. President Richard Nixon eliminated the gold standard for the U.S. dollar to combat rising gold prices contributing to high inflation levels. This action led directly to free-floating currency exchange rates and gave rise to the modern currency OTC market.
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