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Regarding the specifics of buying and selling on
FOREX, it is important to note that currencies are always priced in
pairs. All trades result in the simultaneous purchase of one
currency and the sale of another. This necessitates a slightly
different mode of thinking than what you might be used to. While
trading on the FOREX, you would execute a trade only at a time when
you expect the currency you are buying to increase in value
relative to the one you are selling. If the currency you are buying
does increase in value, you must sell the other currency back in
order to lock in a profit. An open trade (or open position),
therefore, is a trade in which a trader has bought or sold a
particular currency pair and has not yet sold or bought back the
equivalent amount to close the position.
Base and Counter Currencies and Quotes
Currency traders must become familiar also with the means by which
currencies are quoted. The first currency in the pair is considered
the base currency; and the second is the counter or quote currency.
Most of the time, the US currency is considered the base currency,
and quotes are expressed in units of $1 USD per counter currency
(for example, USD/JPY or USD/CAD). The only exceptions to this
convention are in relation to the Euro, the Pound Sterling, and the
Australian dollar--these three are quoted as dollars per foreign
currency.
FOREX quotes always include a bid and an ask price. The bid is the
price at which the market maker is willing to buy the base currency
in exchange for the counter currency. The ask price is the price at
which the market maker is willing to sell the base currency in
exchange for the counter currency. The difference between the bid
and the ask prices is referred to as the spread.
The cost of establishing a position is determined by the spread,
and prices are always quoted using five numbers (for example,
134.85), the final digit of which is referred to as a point or a
pip. For example, if USD/CAD was quoted with a bid of 134.85 and an
ask of 134.90, the five-pip spread is the cost of trading this
position. From the very start, therefore, the trader must recover
the five-pip cost from his profits, necessitating a favorable move
in his position in order simply to break even.
More about Margin
Trading in the currency markets requires a trader to think in a
slightly different way also about margin. Margin on the FOREX is
not a down payment on a future purchase of equity but a deposit to
the trader’s account that will cover against any currency-trading
losses in the future. A typical currency trading system will allow
for a very high degree of leverage in its margin requirements, up
to 100:1. The system will automatically calculate the funds
necessary for current positions and will check for margin
availability before executing any trade.
Rollover
In the spot FOREX market, trades must be settled within two
business days. For example, if a trader sells a certain number of
currency units on Wednesday, he or she must deliver an equivalent
number of units on Friday. Yet currency trading systems may allow
for a "rollover," with which open positions can be swapped forward
to the next settlement date (giving an extension of two additional
business day). The interest rate for such a swap is predetermined,
and, in fact, these swaps are actually financial instruments that
can also be traded on the currency market.
In any spot rollover transaction the difference between the
interest rates of the base and counter currencies is reflected as
an overnight loan. If the trader holds a long position in the
currency with the higher interest rate, he or she would gain on the
spot rollover. The amount of such a gain would fluctuate day-to-day
according to the precise interest-rate differential between the
base and the counter currency. Such rollover rates are quoted in
dollars and are shown in the interest column of the FOREX trading
system. Rollovers, however, will not affect traders who never hold
a position overnight, since the rollover is exclusively a
day-to-day phenomenon.
How the Retail Spot Forex Works
When you use retail spot Forex software, it only requires an
internet connection to trade real-time. No extra data-feed is
required. All online Forex brokers’ software is real-time, rather
than delayed.
If you download a free 30-day demo of the software, you can
"practice trade" in real-time with the exact same quotes as a live
account. The software is exactly the same, and you receive virtual
money for the account. You are then able to enter trades in real
time, and monitor them just as though it were a real account.
You will experience no difference between the demo account and a
live account. When you log onto your trading platform, you see your
price quotes, and you simply click on the price to sell or buy. It
will ask you
how many lots or contracts you want, and then you click ok, and you
are in. You can also use the charts they provide with the trading
platform; they will reflect the movement of the real-time price of
their trading platform. With those charts, you usually have the
ability to place horizontal lines where you choose (pivot numbers).
Each currency is quoted with a pip spread. This is how the dealer
makes his money. With most online retail brokers, there are no
commissions. For example, I want to buy the Swiss Franc, and the
current quote is
1.7205/1.7210. The dealer will give me the 1.7210 price, and I
would start the trade -5 points which equals $30.00.
In my trade window, I would see my money change as the market price
moves back and forth. As it moves in my favor, my negative position
is removed as soon as the market is trading 1.7210/1.7215, or
higher.
In the spot forex market, it is common for currencies to move 100
to 300 pips/points in a 24-hour session. If you like volatility,
there is no currency more volatile than the Franc.
If you want to see the software in action, just register for it at
any of the links around on that site, and download a free demo. You
will get your password and username immediately sent to you by
email.
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