The Foreign Exchange Market goes by many names - Currency Exchange, Foreign Exchange, Forex, FX-but no matter the term, it is simply the trading of one currency against another. Currencies are traded in the form of currency pairs with pricing based on exchange rates and spreads established by participants in the forex market.
Forex Market Size:
The FX market has become the world's largest financial market, and it is about USD 3 trillion traded each day. Even combining the US bond and equity markets, total daily volumes still do not come close to the values traded on the currency market.
The Most Commonly Traded Currencies:
The sheer volume of trading completed every day in the FX market makes it by far the most liquid and most efficient market available. Because of the magnitude of the volumes traded, it is virtually impossible for individuals or companies to influence the exchange rate of the more commonly-traded currencies through any form of open market operations. No single individual has the resources required to manipulate pricing through targeted buying or selling on the market.
There are many currencies which you can trade and IKOFX currently supports up to sixteen currencies pairs and gold commodity market. The vast majority of trades however consist of pairs involving just these seven currencies:
Buying and Selling:
Buying a currency pair implies buying (longing) the first (base) currency and selling (shorting) an equivalent amount of the second (quote) currency to pay for the base currency. For example, buying EUR/USD means that you are buying Euros (EUR) using US Dollars (USD).
A speculator buys a currency pair if she believes the exchange rate for the base currency will go up relative to that for the quote currency (that is, the value of the pair will go up).
Selling the currency pair implies selling (shorting) the first (base) currency and buying (longing) an equivalent amount of the second (quote) currency to buy the base currency. For example, selling EUR/USD means that you are buying US Dollars (USD) using Euros (EUR).
A speculator sells a currency pair if she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.
Placing an Order:
When you request to buy or sell a currency pair, you place an order (also known as "opening a trade") so that you "take a position" based on the exchange rate at the time. Right after you place an order, the value of the position will be close to zero, because the value of the base currency is more or less equal to the value of the equivalent amount of the quote currency. (In fact, the value will be slightly negative, because of the spread involved.)
As time goes on and exchange rates change, the value of the position will evolve to be profitable (or not). When you eventually decide to take a profit or stop a loss on the position, you "close" the trade. When you close the trade, Profit/Loss is calculated from the difference between the exchange rate at the time you opened the trade to the time you closed it.
Examples:
Suppose EUR/USD = 1.5000 and you sell 10,000:
• Your base currency position is 10,000 EUR
• Your quote or counter currency position is 10,000*1.5000=15,000.00 USD
Placing Orders:
To take advantage of perceived market movements, you place an order to either short or long a currency pair . This opens a new position (or trade) that can later be closed to either take profit or stop loss. Orders can be closed manually at any time, or automatically by a stop-loss or take-profit order.
Types of Orders for New Positions:
There are four types of orders you can place to open new positions (trades):
Market orders open a position immediately at the current market rates.
Limit orders open a position at some point in the future should a currency pair reach a specified threshold. There's a specified expiry date when, if the threshold wasn't reached, the order is closed and no position is opened.
Take-Profit orders clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified threshold. Take-Profit orders are typically used to lock in a profit.
For example, if you are long USD/JPY at 118.48 and believe the price will continue to rise until it reaches 120.00 but are unsure what it will do past 120.00, placing a Take-Profit at 120.00 will automatically close your position around 120 (should the market reach that rate) to lock in your profit.
Stop-Loss orders clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified threshold. Stop-Loss orders are typically used to limit losses and quantify risk.
For example, if you are long USD/JPY at 118.48 and set a Stop-Loss at 117, your position will automatically be closed around 117 and you will be protected from a further price decline.
Stop-Loss orders allow you a certain level of comfort when leaving a position open while you are away from your computer and not actively following the markets.
Margin Calculations:
To ensure that the speculator can carry the risk in the case where the position results in a loss, banks or dealers typically require sufficient collateral to cover those losses. This collateral is typically referred to as margin.
Sample Calculation:
The term Net Asset Value represents the current value of your account. It includes your account balance as well as all unrealized profit and losses associated with your open positions. If you were to liquidate your account by closing all positions and withdrawing all your funds, then the Net Asset Value indicates what that amount would be.
If you have no open positions, then the Net Asset Value is simply equal to your Account Balance. (The Account Balance is equal to all of the funds ever deposited into your Account, minus all of the funds ever withdrawn from your Account, adjusted for interest and any profits or losses that have been realized through trading).
If you have open positions then it gets just a bit more involved. The Net Asset Value is equal to your account balance plus/minus any unrealized P/L.
Unrealized P/L refers to the profit or loss held in your current open positions. This is equal to the profit or loss that would be realized if all your open positions were to be closed immediately.
Examples:
If your account is in USD and you are currently long 10,000 units EUR/USD, which was bought at 0.9136, and the current exchange rate for EUR/USD is 0.9125/27, then that position represents 10,000 x (0.9125 - 0.9136) = 10,000 x (- 0.0011) = - 11, or an unrealized loss of $11 USD.
Required Margin depends on the currency pair and the maximum leverage set for your account:
| Max. Leverage | 100:1 | 200:1 | 300:1 | 400:1 | 500:1 |
| Margin Requirement: | 1% | 0.5% | 0.33% | 0.25% | 0.2% |
| Margin for non-major currency pairs: | 1% | 0.5% | 0.33% | 0.25% | 0.2% |
*example：1:500=0.2%=USD100/5=USD20, so you have USD80 free margin,other leverage same and so forth.
Exchange Rates and Spreads:
Exchange Rates
An exchange rate refers to the number of units of one currency needed to purchase one unit of another, or the value of one currency in terms of another. Exchange rates, influenced by real world events, change constantly.
Exchange rates are quoted in currency pairs. The first currency is referred to as the base currency and the second as the counter or quote currency. For example, the exchange rate quoted for the EUR/USD would tell you how many USD (the quote currency) would be needed to buy one Euro (the base currency).
If buying, an exchange rate specifies how much you have to pay in the quote currency to obtain one unit of the base currency. If selling, the exchange rate specifies how much you get in the counter or quote currency when selling one unit of the base currency.
Bid and Ask Prices
IKOFX's MetaTrader Platform uses the bid/ask (bid/offer) method for quoting prices. For example, the exchange rate for EUR/USD might look like one of the following:
• 1.2849/1.2851
• 1.2849 vs 1.2851
The first number is the bid price, or the rate used if you sell a currency. The next set of numbers (after the slash) shows the last few digits of the ask price if you buy a currency. For the EUR/USD example 1.2849/1.2851:
3-Letter Codes
A currency exchange rate is always quoted using standard International Standards Organization (ISO) 3-letter code abbreviations.
Here are some major ISO codes.
| AUD - Australian Dollar | CAD - Canadian Dollar | CHF - Swiss Franc |
| EUR - Euro | GBP - Great Britain Pound | JPY - Japanese Yen |
| NZD - New Zealand Dollar | USD - U.S. Dollar | XAU - Gold |
Spreads
The difference between the bid and the ask price is referred to as the spread. In the example above (EUR/USD at 1.2849/1.2851), the spread is .0002 or 2 pips.
Although a pip may seem small, a movement of one pip in either direction can translate into thousands of dollars in gains or losses in the inter-bank market.
The smart trader pays close attention to spreads, because they are the cost of trading.
