Forex Basics Introduction
What can we Buy or Sell?
There is a wide range of assets available for trading:
- FX world currencies, combined in pairs (for example, you can buy euros for dollars, trading on EUR/USD)；
- Stocks of major companies (Apple, Facebook, Coca-Cola etc.)；
- Energies (such as oil and natural gas)；
- Metals (gold, silver, platinum)；
- Futures, contracts for the future supply of products (on cotton, soybeans, wheat, etc.).
What is the Financial Market?
A financial market forms part of a global ecosystem and refers in general to any marketplace where financial assets are bought and sold.
There are physical stock exchanges in major financial centres, such as London, New York, Chicago, Tokyo, Sydney, Moscow etc. The trading sessions take place within the local business hours of these cities between Monday and Friday.
Traders (sellers and buyers) make transactions between themselves. Approximately 85% of them are speculative traders, who don’t need physical barrels of crude oil or bags of wheat: they seek to profit from the rise or fall of an assets’ prices.
To trade, they use online platforms, such as Metatrader or cTrader, which provide live prices, multiple order types and analytical tools.
When traders believe that the price of an instrument will increase, they place a “Buy” trade, in the hope of earning as the price rises and closing the trade in a profit. When they believe that the price will decline, they will “Sell” in the hope of earning a profit as the price falls.
If the trade goes in the opposite direction to the traders’ forecast, they will make a loss. Once a trade is ‘’closed’’ the Profit or Loss will be added or deducted to the Account Balance.
The price (quotation) of an instrument changes constantly, often updating every second, reflecting the supply and demand for a specific product throughout the world.
When there are a lot of people on the market who want to buy an asset (currency, stock, metal), the demand subsequently grows.
As the demand begins to increase, so does the price. This is because the bidders become so interested in opening a Buy position that they are willing to accept a higher price.
Conversely, when there is a low demand for a product, prices will generally fall, as more and more traders are selling, and this forces buyers to agree with prices that are not ideal for them.
Factors that affect an asset’s quoted price include among others:
- News: Negative data for any country leads to a decrease in the value of its national currency. Positive data, on the other hand, can lead to increase.
- Central Bank policy: Interest rate decisions and the statements of the central banks’ representatives.
- Corporate reports: companies whose shares are listed on the stock exchange regularly publish their financial results. These figures can have significant effect on the share’s price especially if they are significantly different from analysts’ expectations.
- Government data: Includes the unemployment rate, inflation level and trade balance reports. Markets closely follow not only the numbers but also any comments made regarding changes to monetary policy.
A day on the financial market is divided into global trading sessions: the opening hours of the largest stock exchanges in the world. They open during daytime hours in the respective time zone of each exchange. A Trading day begins with the Pacific session, then the Asian one overlaps it; the London session takes over and finally the American one. In the hours when sessions overlap, the quotes change particularly rapidly, due to increased volatility (i.e. more market participants).
The financial market is divided into categories: stock market, metals, bonds, futures etc. But the most popular is the currency market – Forex (Foreign Exchange). Now let’s take a closer look at an example to help demonstrate the principle of making trades via an online CFD trading platform.
To understand this, look the example below (how many US dollars is received for 1euro):
EUR/USD = 1.07407
The price of EUR/USD shows that 1 EUR is equal to 1.07407 USD. This means that you need 1.07407 US dollars to buy 1 euro, or that you can get 1.07407 USD when you sell 1 EUR.
Euro, in this case, is the base currency (the price of which we want to determine), and the dollar is the term (quote) currency (in which the price is expressed).
What is Bid/Ask and what is the difference between them?
Take another look at the market watch on your trading platform. You should see two columns, in which the quotes are constantly changing, highlighted in two colours.
E.g. for EUR/USD could be:
What is margin?
‘Margin’ (or used margin) represents the amount of funds required to secure positions. When you place a trade, the ‘margin’ is locked in until the trade is closed.
The exact required margin amount depends on the instrument, the size of the position and the leverage.
To calculate it you can use the formula:
Trade size in units / Leverage = Margin in base currency
Trade size in units / Leverage X Exchange rate = Margin in quote currency
Now let’s see how the amount required depends on the chosen leverage:
Higher leverage → Fewer funds needed as a margin
Lower leverage → More funds needed as a margin
So, if you want to buy one standard lot (€100,000) for EUR/USD, without using any leverage (1:1), you need to have €100,000 on your account.
The ‘margin level’ is the ratio of the amount of equity you have compared to the used margin.
It is represented as a % and calculated with the formula:
Equity / Margin X 100
When the margin level drops to 100% or lower, that means the entire equity of your trading account is used as collateral, and you can no longer open any other positions. This results in a negative ‘free margin’.
What is Contract for Difference?
‘CFD’ stands for ‘contract for difference’ and consists of an agreement (contract) to exchange the difference in the value of a currency, commodity, share or index between the time at which a contract is opened and the time at which it is closed. If the asset rises or falls in price, the buyer receives or earns cash from the seller. CFD pricing is based on the movements of the underlying asset.
Benefits of Trading CFDs
No Transaction Fees
Both up/down can be profitable
Ease To Access
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