What is Forex Trading?
The Foreign exchange market, commonly known as FOREX or FX is the exchange of one currency for another at an agreed exchange price on the over-the-counter market.Forex is the world’s most traded market, with an average turnover in excess of $4 trillion per day. Compare this to the New York Stock Exchange, which has a daily turnover of around US$50 billion and itís easy to see how the foreign exchange market is the biggest financial market in the world. Essentially, forex trading is the act of simultaneously buying one currency while selling another, primarily for the purpose of speculation. Currency values rise (appreciate) and fall (depreciate) against each other due to a number of factors including economics and geopolitics. The common goal of forex traders is to profit from these changes in the value of one currency against another by actively speculating on which way forex prices are likely to turn in the future. Unlike most financial markets, the OTC (over-the-counter) forex market has no physical location or central exchange and trades 24-hours a day through a global network of businesses, banks, Brokers, and individuals. This means that currency prices are constantly fluctuating in value against each other, offering multiple trading opportunities.
*24-Hour Forex Trading*
One of the key elements behind Forex ís popularity is the fact that Forex markets are open 24-hours a day from Sunday evening through to Friday night. Trading follows the clock, opening on Monday morning in Wellington, New Zealand, progressing to Asian trade spearheaded out of Tokyo and Singapore, before moving to London and closing on Friday evening in New York. The fact that prices are available to trade 24 hours a day helps to ensure that price gapping (when a price jumps from one level to the next without trading in between) is less and ensures that traders can take a position whenever they want, regardless of time, though in truth there are certain times when volumes are below their daily average which can widen market spreads.
Foreign exchange is a leveraged (or margined) product, which means that you are only required to deposit a small percentage of the full value of your position to place a forex trade. This means that the potential for profit, or loss, from an initial capital outlay, is significantly higher than in traditional trading. Find out more about risk management.
All Forex is quoted in terms of one currency versus another. Each currency pair has a base currency and a counter currency. The base currency is the currency on the left of the currency pair and the counter currency is on the right. For example, in EURUSD, EUR is the base currency and USD the counter currency. Forex price movements are triggered by currencies either appreciating in value (strengthening) or depreciating in value (weakening). If the price of EURUSD, for example, was to fall, this would indicate that the counter currency (US dollars) was appreciating, whilst the base currency (Euros) was depreciating. When trading Forex prices, you would buy a currency pair if you believed that the base currency will strengthen against the counter currency. Alternatively, you would sell a currency pair if you believed that the base currency will weaken in value against the counter currency. Some examples of major currency pairs are: EURUSD (The value of 1 EUR expressed in US dollars) USDCHF ( one USD expressed in Swiss francs)
Pips (Percentage in Points)
Pip stands for Percentage in Points. Most currency pairs are quoted to 5 decimal places with the change from the 4th decimal place (0.0001) in price commonly referred to as a ‘pip’. For example, if the price of the EURUSD Forex pair moved from 1.33800 to 1.33920, it is said to have climbed by 12 pips (92-80=12).
The difference in the BID/ASK of the currency pairs is referred to as the ‘spread’. An example would be EURUSD dealing at 1.33800/1.33808 (in this case the spread is 0.8 pips or 0.00008). The exceptions to this are the JPY pairs which are quoted to just 2 decimal places. A USDJPY price of 97.41/97.44 displays a 3 pip ‘spread’.
What affects Forex prices?
Forex prices are influenced by a multitude of different factors, from international trade or investment flows to economic or political conditions. This is what makes trading Forex so interesting and exciting. High market liquidity means that prices can change rapidly in response to news and short-term events, creating multiple trading opportunities for retail Forex traders. Some of the key factors that influence Forex prices are: Political and economic stability, Monetary Policy Currency intervention Natural disasters (earthquakes, tsunamis etc)
Spread Betting vs Shares Dealing
Spread betting provides an alternative to traditional trading because, while there are similarities between the two, spread betting has exciting additional features: *Tax-free profits* – *NO Capital Gains Tax to pay on your profits* and spread betting is also free from Stamp Duty No commission fees to pay, spread betting is free from commission Leveraged trading one can speculate on share prices with just a fraction of the total trade value. Instant access to over 12,000 markets at any time access to UK, EU, US, Asian shares and many more asset classes. Take advantage of falling share prices In traditional shares dealing, you physically buy a certain number of a company’s shares in the hope that these shares will rise in value and you can sell them back later at a higher price. You can only profit if the share price increases. However, in spread betting, you can speculate on any price movement of a company’s share price – up or down. In stark contrast to traditional shares dealing, this means you can also place a spread bet trade on a falling share price – called going short – something that is not possible in traditional shares dealing.
Spread bets vs CFDs
The fundamentals of spread betting and CFD trading are in fact very similar but there are some key differences eg: Range of Markets: Spread bets and CFDs offer a broader range of markets to trade including indices, stocks, and forex. various Trading Platforms: You can gain access to browser-based and downloadable platforms as well as award-winning mobile and tablet trading platforms. Capital Gains Tax: Currently in the UK, all gains made in spread betting is free from UK Capital Gains Tax. *This benefit is not applicable to gains made in CFD trading* UK Tax Laws are subject to change. Re: Commissions: With CFD equity trades only you are charged a small commission for each trade you place. For all other CFD markets and spread bets, trades are free from commission, but you pay a slightly widened spread. Guaranteed Stop Losses: This is available to both spread betting and CFD trading products. Trade Sizes: Trade sizes differ across spread bets and CFDs. For more information, please see the table below. Margin/Leverage calculations: In some markets, spread bets and CFD markets are margined differently, as either fixed percentage such as 5% or margin factors such as 60 x stake Examples of key differences between Spread Bets and CFDs*
The two key differences in the mechanics between spread bets and CFDs relate to leverage and trade sizes. Below you can find out more information about both of these two key differences.
Trade sizes and notional value examples*
The mechanics behind your trade size, or quantity, and how this correlates to your trade notional value differs across spread betting and CFDs with spread bets your trade size is correlated to a stake size, whilst CFD trade sizes by a number of CFDs.
Spread betting stakes
Let’s say you wanted to go long, or buy, Company ABC shares, which are currently trading at a price of 550p. You decide to place a buy spread bet of £10 per point. This means that for each penny Company ABC shares rally above 550p, you net a £10 gain. The notional value of the spread bet is £5,500 (£10 x 550p).
CFD trade sizes
Alternatively, if you wanted to buy Company ABC shares through a CFD trade, which is still trading at 550p, you could go and buy 1000 CFDs. This means that your profits or losses (P&L) will increase for each penny Company ABC shares rally or fall. Your total P&L is calculated as the difference between the opening value of the contract to the closing value of the contract. The notional value of the CFD trade is £5,500 (1000 CFDs x 550p).
Your leverage or initial margin calculations also differ across our key three products; spread betting, CFDs, and Forex. Spread betting The amount of margin you are initially charged to place a spread bet will differ depending on whether you are spread betting on an equity market, or a non-equity market. For equity spread bets, your initial margin is a fixed percentage, i.e. 10% of the notional value of your trade. However, for non-equity spread bets, your initial margin is a margin factor multiplied by your stake size. For example, if you were to place a buy spread bet of £5 per point on Company ABC’s shares, which have an initial margin rate of 10%, and whose price is currently 550p, your initial margin requirement would be £275 (£5 x 550p x 10%). However, if you were to place a buy spread bet of £2 per point on the FTSE 100, with a margin factor of 60 x stake, and the current indicative price is 5900, your initial margin requirement would be £120 (£2 x 60).
The amount of margin charged initially for CFD trades is a fixed percentage of the trades notional value. For example, if you were to place a sell CFD trade of 1,000 on Company ABCís shares price, with it currently trading at 549p and has an initial margin rate of 10%, you would be charged an initial margin of £549 (1,000 x 549 x 10%). There are Range of Markets, , over 12,000 including shares, indices, FX and commodities traded every day….
*The FOREX market is the most liquid market in the world*
Forex market spreads tend to remain tight throughout most of the day, whilst traders have the safety of the knowledge that positions and orders can always be executed. With an average turnover in excess of US$4 trillion per day being traded by governments, central banks, financial institutions, corporations and professional and retail traders, foreign exchange is the largest financial market in the world. In comparison, the New York Stock Exchange has a daily turnover of around US$50 billion. Features of Forex Trading = Forex is a 24-hour mark and is traded continuously round the clock, except on weekends, meaning that traders have unlimited access, utilized meaning that trading is available to trade 24-hours a day, from Sunday evening GMT to Friday night GMT. Leverage = Forex trading is leveraged and utilize this leverage to increase their exposure to currencies and magnify their potential profits. With leverage, you can control a relatively large exposure for only a small initial deposit amount in your trading account, potentially maximising your return on investment. Volatility = Foreign exchange rates can change rapidly in response to any real-time economic and political events. This offers great opportunities for traders to make profits in the forex markets. Of course, volatility can be a double-edged sword, and losses can accumulate just as quickly. Ability to go long and short = Unlike traditional equity markets, forex trading allows you to trade and profit on any price movement up or down. As a Forex trader, you can go long (buy) on a currency pair when you expect the first currency will strengthen (appreciate) against the second currency and your profits will rise in line with any increase as the exchange rate goes up. You can also go short (sell) on the currency pair when you expect the first currency will weaken (depreciate) against the second currency and your profits will rise in line with any fall in the exchange rate. *It is important to remember however that leveraged forex trading or spread betting involves greater risk of loss and may not be suitable for everyone. You can lose more than your initial deposit if the market moves against you*
My Mission is to utilize both mine and clients pooled Investment Capital and PROFIT from Trading the Financial Markets, using my Expertise, knowledge Technical and Fundamental, while enjoying the autonomy and Massive PROFIT’S possible with FOREX Spread Betting.
“Essentially, Forex Trading is the act of simultaneously buying one currency while selling another, primarily for the purpose of speculation.”