Forex Trading Basics

View foreign exchange quotes

What you need to know before setting up your first foreign exchange transaction

The quotes in the foreign exchange market may be confusing, because any one position you open in the market is actually two different positions. In the case of foreign exchange, currencies will be listed in pairs. Forex offers you more choices than other markets. For example, you may be optimistic about the euro, so you want to buy the euro. As far as foreign exchange is concerned, you can choose the currency in which the euro is bought. You can buy Euros with US dollars or Japanese Yen, whatever you want. You can buy Euros in a range of other currencies that we provide. Therefore, currency pairs will be displayed in the following manner.

EUR / USD

EUR / USD

The first listed currency is called "base currency", and the second listed currency is called "relative currency" or "quote currency". Therefore, in terms of the euro / dollar, the euro is the base currency, and the dollar is the relative currency. If the exchange rate for this currency pair is 1.4700, this quote shows how much relative currency is needed to buy a unit of base currency. Therefore, it takes 1.47 USD to buy one Euro.

When opening a transaction, please keep in mind that when you open a position at any time, you are opening a base currency position. Therefore, if you buy a currency pair, you are buying the base currency. If you sell a currency pair, you are selling the base currency. So, you can easily remember that the opposite of what currency does. If you buy EUR / USD, you are buying EUR and selling USD. If you are still very confused, you can simply think about it this way. Buy if you think the exchange rate will climb; sell if you think the exchange rate will go down. It's that simple.

You will often see quotes on both sides-the purchase price and the selling price. The buying price is the price at which you can buy the currency pair, and the selling price is the price at which you can sell the currency pair. The difference between the two prices is called the "bid price". The bid-ask spread is determined by the price provider and the market liquidity at that moment. All tradeable instruments, stocks, bonds, futures, options, etc. have a bid-ask spread, but traders may not always be able to detect it.

In summary, I believe you have some understanding of how currency pairs are quoted and what currency you are buying and selling when you establish a transaction.

What is an idea?

idea

"Pip" refers to a point calculated as a percentage. Simply put, in the world of foreign exchange, a point is a "pip" for calculating profit and loss. For standard (10k) accounts, each point is approximately equal to one unit of account settlement currency. For example, if your account uses USD as the settlement unit, each point (depending on the currency pair) is approximately equal to 1 USD. For micro accounts, the amount of each point is about one tenth of the standard account-that is, about 0.10 US dollars.

For all currency pairs involving the Japanese Yen (JPY), one point is one percent-that is, the second decimal place. For all other currency pairs, one point is one ten-thousandth-the fourth decimal place. As for how to calculate the value of each point, the following is a simple formula.

Start with your trading unit first. The micro trading contract is 1k, so if you want to use the point value of the micro trading contract, please use 1,000. If you want to use the standard hand value, please use 10,000. After that, you multiply the trading unit by a bit of the currency pair you bought and sold. Some people may be clueless about this, so let's take an example. In the following example, we will calculate the lot value of 10k EUR / USD.

Since I use a standard 10k trading unit, I will start with 10,000. Multiply 10,000 by ".0001" because the idea for all currency pairs is one-tenth of 10,000 (except for yen currency pairs). The value obtained is 1. This number will be denominated in the "relative currency" (second currency) in the currency pair I am trading. In this example, I am trading in EUR / USD, so the US dollar is the relative currency in the currency pair. In the case of a lot of 10k EUR / USD, one point is worth 1 USD. If my account uses USD as the settlement currency, whenever the EUR / USD changes by 1 pip with the market, my account will generate a profit or loss of USD 1.

Leverage and margin

Leverage and margin are an important concept that you need to understand, because if used improperly, leverage may soon cause you trouble. If used properly, leverage can increase the profitability of your trading strategy.

"Leverage" and "margin" refer to the same concept, but the views are slightly different. When a trader opens a position, they need to "sincerely" hand over the amount of the position value. In this case, the trader can be said to be "leverage used." The amount that needs to be paid is called "margin requirement". Margin requirements are also often referred to as "credit margin", because traders can usually get back the amount after closing the position. I say "normal" here, because if there is a margin call, the situation will be very different, and the situation will be explained in detail later.

For clarity: Margin deposit is a transaction requirement, not a transaction cost. A major benefit of the foreign exchange market is that it provides some of the minimum margin requirements for any financial instrument that can be bought and sold. This means that the purchasing power of your account is much higher than the stock trading account or bond trading account of the same size.

Now consider an example of leverage and margin.

Suppose that a trader opens a position in a dollar / yen currency pair. Traders do not need to hand over $ 100,000, they only need to hand over $ 500 or $ 250. (The actual amount will depend on the leverage level set by the account.) The default leverage of the demo account is 200: 1, so the margin requirement for a 100,000 USD position is only 500 USD (0.5% of 100,000). If a trader creates two orders of USD 100,000, their total position will be USD 200,000, and the current margin requirement is USD 1000.

It is worth noting that the margin requirement is not the maximum limit of possible losses for positions. This is just the amount that the broker requires you to hand over to open the position. You need to keep in mind the actual size of the position, because profit and loss will be calculated based on the size of the position, not the amount of margin required. The following table provides other examples.

Required margin Position holding unit-nominal value lever Margin%
$50 $10,000 200:1 0.5%
$100 $10,000 100:1 1%
$200 $10,000 50:1 2%

Traders must always keep in mind that leverage is a double-edged sword: when the position moves in a direction that is good for you, a high degree of leverage can increase profitability, and when the position moves in a direction that is not good for you, it will increase loss.

For this reason, do not subject too much account value to risk and / or establish excessive positions relative to the account size, resulting in excessive leverage of your account.

As for what is meant by excess, it varies by individual trader. Short-term traders are generally accustomed to using larger leverage, because they know that holding positions is not long. Longer-term traders use lower leverage, so slight volatility will not cause their positions to be closed. We recommend that you try different leverages on different trading strategies in the demo account to find the most suitable trading model for you. Please keep in mind that the large amount of leverage available does not mean that you should always use high leverage.

Overnight interest

We will discuss overnight interest in this section. We will first explain the concept of overnight interest, and then look at an example of calculating overnight interest. We will show you how to use overnight interest, because many successful traders will regard it as an important part of the trading strategy.

Overnight interest is the interest paid or earned for holding positions overnight. The target interest rate associated with each currency (generally determined by the currency's central bank). Please refer to the following table:

NZD GBP CAD AUD USD EUR JPY
             
2.25% 0.50% 0.50% 2.00% 0.50% 0.00% -0.1%

The above table shows only an example and does not represent real-time interest rates.


As we mentioned in viewing foreign exchange quotes, whenever you open a foreign exchange position, you are buying a certain currency and selling another currency. Therefore, you will earn the interest rate of the currency you bought and pay the interest rate of the currency you sold. The net difference will be deposited or deducted from your account as overnight interest daily (at 22:01 GMT). It is worth noting that overnight interest only applies to open positions held at 22:01 GMT. If you close the position before the overnight interest time, or open the position after the overnight interest time, no interest will be paid or deducted.

Generally speaking, foreign exchange is a two-day market. This means that positions will only be settled two days after opening. On Wednesday, the position will be converted to Thursday. Technically, these positions will be settled on Saturday. The bank is closed on Saturday, therefore, the position will be transferred to Monday through the weekend. In short, the overnight interest on Wednesday is generally equal to the interest on three days. Overnight interest does not apply to open positions held on Saturday and Sunday. I hope you now know how to use overnight interest.

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