Forex 101

Introduction to the Forex

The purpose of trading on any market is to buy low and sell high. The foreign currency market FOREX is no exception. The goods traded on this market are rates of currencies of different countries. As any other goods the currencies have their prices.

To settle transactions between businesses located in different countries, governments, speculative transactions and so forth, banks around the world execute currency trades on FOREX market. Depending on various trade, economical and other parameters, interest rates, central bank policies, time of the day, preferences and anticipations of the market players, and many other causes, the rates, that is prices, of currencies stay in ceaseless motion.

Your task as a trader is to determine the trend of the rate and buy an appreciating currency or sell a depreciating one, and then take your profits through execution of a reverse transaction.

Our dealing center gives you the opportunity to use software to obtain real time currency quotations from different banks and largest world exchanges participating in FOREX market. At the same time, the rate charts for every currency are displayed for you, and hottest economical News that may affect currency rates now or in the future directly or indirectly are fed to your screen.

And, at last, you will have a special trading account allowing you to buy and sell desired currencies. Despite of having US dollars in your account, you may start your trading from selling japanese yens not concerning yourself with not having bought them in advance.

Codes, Numbers and Definitions

Each currency is assigned a three-letter code.

  • US dollar is coded – USD (United States Dollar)
  • Euro is coded EUR (EURo)
  • Swiss frank is coded CHF (Confederation Helvetica Franc)
  • Japanese yen is coded JPY (JaPanese Yen)
  • British pound is coded GBP (Great British Pound)

Currency rates are equal to ratios of currency units of different countries relative to each other. The rates are represented by 6-letter words composed of two three-letter currency codes. The first position is occupied, as a rule, by the code of a more expensive currency. The rates are expressed in units of the second currency per unit of the first one. For example, rates USDCHF (USD-CHF) show the number of Swiss franks in one US dollar, but rates GBPUSD (GBP-USD) show the number of US dollars having to be paid for one British pound.

The rates are usually expressed as five-digit numbers. For example, USDJPY = 121.44 means that 1 US dollar is valued at 121.44 Japanese yens (i.e. they are willing to pay you that many yens for one US dollar while you are buying or selling). At the same time, GBPUSD = 1.6262 means that 1 British pound is valued at 1.6262 US dollars. Generally, if the rate XXXYYY = Z, it means that one unit of XXX is worth Z units of YYY.

When the rate has changed, for example USDJPY = 121.44 to USDJPY = 121.45 or GBPUSD = 1.6262 to 1.6263, they say that the rate has moved 1 point. As it follows from the information above, yen in this example has DEPRECIATED by 1 point, but the pound has APPRECIATED, also by 1 point.

While watching the charts, you should keep in mind that only euro (EURUSD) and British pound (GBPUSD) charts reflect real movements of the rates of these currencies (that is, chart going up, means increasing price), as growth (that is, charts moving up) mean decreasing rates (prices) for the other currencies.

Your trading account is kept in US dollars, this is why it would help to know the worth of this 1 point expressed in other currencies. The point’s worth is determined by the following algorithm: you should divide the size of a lot by the rate disregarding the position of the decimal point. For example, in the example above the worth of one point USDJPY expressed in US dollars = 100000 / 12144 = $8.24. Or, for GBPUSD one point’s worth = 100000 / 16262 =$6.15. Consequently, the worth of one point is different not only for different currencies, but also for the same currency in different quotations.

It is known, that every transaction is executed at a rather well defined and concrete price, while the table Quote Spread Sheet lists three prices for each currency, for example:

Each of the participants of FOREX market enters each trade as either a SELLER or a BYUER of a particular currency. In so doing, the seller offers the currency at a higher price, for example GBPUSD at 1.6325, while the buyer bids for it at a lower price, for example, GBPUSD at 1.6322. The seller’s price is called ASK and the buyers price is called BID accordingly. This is why, if you anticipate GBPUSD to appreciate (your GBPUSD chart to go up), then you should decide to buy the pound when it is low to sell it high later. You can BUY only from a seller offering it at the price equal to ASK. Should you be selling the pound (this operation is called SELL), the buyer will bid at a price equal to BID for it (this holds true for all currencies). The obvious conclusion is that if you have OPENED a !! position (the operation is called OPEN), that is you have executed BUY GBPUSD, and want to CLOSE it immediately (the operation is called CLOSE), that is to sell the pounds you have just bought, then you could do it only at a loss, similar to what would happen at any currency exchange booth. Consequently, to make a profit you should let the rate move in the anticipated direction more than the difference between BID and ASK. The third number is called LAST, which is an average of last BID and ASK on Forex.

To sum up, for USDCHF and USDJPY OPENING of a SHORT position (that is BUY) is executed at the BID price, and the CLOSING at the ASK price respectively; correspondingly OPENING of a LONG position (that is SELL) is executed at the ASK price, and CLOSING at the BID price.

For GBPUSD and EURUSD OPEN BUY (up) occurs at the ASK, ànd CLOSE at the BID, while OPEN SELL (down) happens at the BID, ànd CLOSE at the ASK.

Forex Trading Tools

Let us get acquainted with some useful trading tools allowing us to protect ourselves from unforeseen losses to certain degree and take the expected profits.

These are STOP and LIMIT. For a previously opened position an instruction may be entered at any moment (during the working days) to close it, if the rate reaches a preset level. For example, you have opened a position expecting the rate to go up (on the chart). To protect yourself from significant losses if the rate moves down, especially in such a situation when you don’t have or are about to lose control of the market, you should enter a STOP, that is set a price at below its current value at which your position should be closed with no further instructions. Similarly, if you have opened a down position, then you should specify a price above its current value. In this case you should bear in mind that if the STOP is set too closely to the current rate value, then a random rate fluctuation may close a correctly open position at a loss, but if it is set too far, then the losses could become unreasonably high. LIMIT is a rate value that you set at which the position should be closed with a profit, that is the value of the LIMIT should always be above the current level, if you play long, and below it, if you play short. It should be noted that STOP and LIMIT should differ by more than 20 points from the current values of BID or ASK (in accordance with what side of the market you play and which of these tools you use).

A few more words about the differences between operations and service in a training and a real trading accounts.

In the quoting mode of a training account real quoting does not occur, and the offered price corresponds to slightly modified BID/ASK ratio (depending on whether you play long or short). Naturally, with a real account the offered price does not usually coincide with the value of BID/ASK (the difference is 1-2-3 points in a calm market, more often than not it’s not in your favor).

The time lag between a rate inquiry and the receipt of a quotation (about 10 s) in a training account simulates the real-life lag rather well (usually 40-50 s, sometimes longer). It should be kept in mind, though, that the quoted rate is equal to the rate at the moment of quoting, rather than the moment of inquiry.