What is Forex?

Forex, or Foreign Exchange, is the simultaneous buying of one currency while selling for another. This market of exchange has more buyers and sellers and daily volume than any other in the world. Taking place in the major financial institutions across the globe, the forex market is open 24-hours a day.

Buying/Selling

In the forex market currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to buy the currency that increases in value relative to the one you sold. If you have bought a currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit.

Quoting Conventions

Currencies are quoted in pairs. The first listed currency is known as the base currency, while the second is called the counter or quote currency. In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a point or a pip

Like all financial products, Forex quotes include a "bid" and "ask". By quoting both the bid and ask in real time, FXCM ensures that traders always receive a fair price on all transactions. As in any traded instrument, there is an immediate cost in establishing a position. For example, USD/JPY may bid at 131.40 and ask at 131.45, this five-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.

Margin

The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value. FXCM?s online trading platform has margin management capabilities, which allow for this high leverage.

In the event that funds in the account fall below margin requirements, the FXCM Dealing Desk will close all open positions. This prevents clients' accounts from falling into a negative balance, even in a highly volatile, fast moving market.

Rollover

For positions open at 5pm EST, there is a daily rollover interest rate a trader either pays or earns, depending on your established margin and position in the market. If you do not want to earn or pay interest on your positions, simply make sure it is closed at 5pm EST, the established end of the market day.

What Every Currency Trader Should Know

The forex market is one of the most popular markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available. FXCM allows positions to be leveraged up to 100:1. Without proper risk management, this high degree of leverage can lead to enormous swings between profit and loss. Knowing that even seasoned traders suffer losses, speculation in the forex market should only be conducted with risk capital funds that if lost will not significantly affect one's personal financial well being.

The FXCM Mini account was designed for those new to online currency trading. There is a smaller deposit required to open an FXCM Mini account and trading sizes are 1/10th the size of a regular account. The smaller trade size enables traders to take smaller risks. The FXCM Mini is intended to introduce traders to the excitement of currency trading while minimizing risk.

Liquidity

The spot Forex market is a $1.4 trillion daily market, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. If you compare this to the $30 billion per day futures market it becomes clear that the futures markets provide only limited liquidity. The market is always liquid, meaning positions can be liquidated and stop orders executed without slippage.

24-Hour Market

The Forex market is a seamless 24-hour market. At 5 PM Sunday, New York time, trading begins as markets open in Sydney and Singapore. At 7 PM the Tokyo market opens, followed by London at 2 AM, and finally New York at 8 AM. As a trader, this allows you to react to favorable/unfavorable news by trading immediately. It also gives traders the added flexibility of determining their trading day.

By comparison, the currency futures markets in the United States, such as the Chicago Mercantile Exchange and Philadelphia Exchange, have regulated hours. The CME, for instance, opens at 8:20 AM New York Time and closes at 2:00PM. Therefore, if important data comes in from England or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride.

Execution Quality and Speed

The futures market is known for inconsistent execution, both in terms of pricing and execution time. Every futures trader has experienced a half hour wait for a market order to be filled and has been executed at a price far away from where the market was supposed to be trading. Even with electronic trading and limited guarantees of execution speed, the price for fills on market orders is far from certain. FXCM offers instantaneous execution and price certainty. On the Forex trading station, traders execute directly off real time streaming prices. There is no discrepancy between the displayed price and the execution price. This holds true even during volatile times and fast moving markets. In the futures market, execution is uncertain because all orders must be done on the exchange. This creates a situation where liquidity is limited by the number of participants, which in turn limits quantities that can be traded at a given price. Real time streaming prices ensure that market orders, stops, and limits are executed without slippage and/or partial fills.

Commission Free Trading

In the futures market traders must pay a spread and a commission. All traded financial products have a “bid?(buy) price, and an “ask?(sell) price, with the difference defining the spread, or cost of execution. Up until recently, lack of transparency in the futures market has disguised the spread. Now online trading platforms, which show the depth of the market by including both the buy and sell price, allow traders to see the real cost of the trade. Because the currency market offers round-the-clock liquidity, traders receive tight, competitive spreads both intra-day and night. Futures traders are more vulnerable to liquidity risk and typically receive wider dealing spreads, especially during after hours trading.

FXCM charges no commission or transactions fees to trade currencies online or over the phone. The over-the counter structure of the currency market eliminates exchange and clearing fees, which in turn lowers transaction costs. Costs are further reduced by the efficiencies created by a purely electronic market place that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen. All clients have access to dealable bid/ask quotes. In the futures market the prices represent the LAST trade, not necessarily the price for which the contract will be filled. This lack of transparency hides the true cost of the trade.

Reporting and Back Office Capabilities

In the spot FX market, traders can see the value of their positions and account equity move up and down with the market in real time. The key information for every account is re-calculated and updated every time the exchange rates change. Traders have immediate access to detailed information regarding every open position, open order, and the generated P/L per trade. Traders also have 24-hour access to full, real time snapshots of their account statement since inception, or on a daily, weekly, monthly or yearly basis. As a trader this means you never have to approximate your account equity or be uncertain in regards to available margin.

Margin/Risk Management

For the purpose of risk management, traders must have position limits. This number is set relative to the money in a trader’s account. Risk is minimized in the Spot FX market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the dollar value of the account as a result of trading losses. All open positions will be closed immediately regardless of the size or the nature of positions held within the account. If futures market moves against you your position may be liquidated at a loss and you will be liable for any resulting deficit in the account.