We always encourage our clients to obtain maximum information before starting trading. Please note that Forex and CFD trading involves significant risks. It is crucial to understand how the market works as well as the meaning of the specific trading terms.
Sam lives in the US and is traveling to Europe. The current exchange rate is 1. This is a foreign currency exchange or Forex. The forex market is a place where currencies are traded. Each bank or money changer has its own rate.
The forex market consists of all these banks and money changers; it is not just one special place or one exchange. The forex market is decentralized and it is huge, with a turnover of around 4 trillion USD a day. It is much bigger than the equity market and is extremely liquid and volatile. Online trading involves a trading process that is carried out via the Internet. Users can access online trading platforms on the Internet. They can see current market prices and make deals as well as oversee all their trading activity.
A CFD, or a Contract For Difference, is an agreement between two parties to exchange the difference between the opening and the closing prices of a contract at the moment of the contract closure, with this difference multiplied by the number of units of the asset specified in the contract. A CFD is a derivative linked to the underlying asset price. It does not involve physical asset delivery.
When you trade in forex online, you do not buy or sell real assets. You make a deal that, at the moment you close the deal, you will receive or pay the difference between the opening and the closing prices multiplied by the number of units. At the time of Sam's purchase, the current rate was 1. Sam has just closed and the closing rate was 1. Currencies differ from other assets because they are traded in pairs. When you trade shares or gold, you buy or sell with money.
With forex, you trade one currency against another currency: Therefore you are trading two currencies, or a currency pair, simultaneously. Currencies in a currency pair are denoted by 3 capital letters according to the International Standard for currency codes - ISO The first 2 letters are the same as the country code according to the International Standard for country codes, ISO And the third letter represents the currency name.
There is a common international practice regarding which currencies are base currencies and which are counter currencies in currency pairs based on the following specific priority rankings:. These are the world's main currencies. Other currencies are generally quoted against one of the major currencies. If currencies are quoted according to this practice, the quotation is "direct", if vice versa - "indirect". The most traded currency pairs in the world are called "majors".
Cross-currency pairs that consist of the main currencies e. Other currency pairs, where a non-main currency is traded against a main currency, are called "exotics"; e. When you buy an asset, you are going "long". When you sell, you are going "short". When you trade currencies, you buy one currency and simultaneously sell another currency.
So you are going long for one currency and simultaneously opening a short position for another currency. Quotes for trading instruments usually have two sides: The bid price is the price of an asset at which the market or broker is ready to buy from a trader that is, the trader can sell, or go short, at this price. The Ask or Offer price is the price at which a trader can buy an asset.
This means that 1. The current rate for gold is This means that the spread is Currency pair prices used to have 4 digits after the decimal point e. Now, however, prices can change by one-tenth of a pip, or by 1 fractional pip, also called a pipette. Now you can see the following quotation - So the pip traditionally was the smallest price increment - 0. And despite the fact that a currency pair can now be quoted with more decimal places thanks to more precise pricing, the pip remains the same.
Account Currency - USD. Equity is the amount of money you have if you close all your positions. Sam's balance is 2, USD. The maintenance margin requirement Stop-Out Level is the level below which the position is closed:. Sam's account balance is 2, USD. When equity on Sam's account goes below USD, the position will be closed automatically.
Leverage is a gear or a multiplier required to open a position bigger than your deposit. Sam deposits USD into his account. If you open a position and do not close it by the end of the same day, your position will be rolled over to the next day. Rollover is achieved by two simultaneous deals: This mix of two opposite deals in one operation is called a swap. The difference between the forward and the spot rates is called swap points.
The forward rate is based on the idea that amounts in both currencies are paid with an overnight interest rate. The difference between these two rates, or the Interest Rates Differential, results in positive or negative swap points.
Sam keeps this position until Tuesday. In this case Sam's position was closed on Monday at 1. This was common practice for all market participants, including big banks. At first ECNs were available for banks and big brokers, enabling them to trade with each other at the best prices available in their network.
Each of these networks formed a market with its own pricing and spreads, charging a commission for its services as a technology provider. Later on, ECNs became available to smaller brokers and their clients. On such accounts clients get very tight raw interbank market spreads and are charged a commission for the service. Commissions on the interbank market are charged on a per-traded-volume basis. To calculate your deal commission, you need to determine your deal volume in USD, divide by one million, and then multiply it by the ECN commission value.
Keep in mind that deal volume is measured in the base currency terms. In this example, Sam's deal volume is , EUR. If, for example, Sam chooses to close the deal at the same rate of 1.
When you trade in MetaTrader 4, please keep in mind that due to system settings the whole commission is charged once at the order opening. Such accounts are designed specifically for clients who are used to commissions not being charged separately and with all broker fees included in the spread.
The trading costs are the same as for the MT4. When a trade is opened at market, the trading platform sends a request for an order of a specified size to be filled immediately at the best price available.
It is important to note while trading using Market Execution that if the instruments are volatile or otherwise moving quickly, it is possible for the order to be executed at a price above or below the price shown in the trading platform when the trade request was initially submitted — orders are filled at the best available market price.
It is possible to receive several Requotes in a row before an order can be filled. Execution Price may differ significantly from the Requested Price, especially during low liquidity market conditions, e. While there may be a large candle during price spikes, this does not mean that orders had been filled anywhere in the center of that candle because there are no prices available - also known as "price gap".
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Below you can find some basic information about the market and trading: There is a common international practice regarding which currencies are base currencies and which are counter currencies in currency pairs based on the following specific priority rankings: Sam buys stock, so he has opened a long position. It is measured in base currency units. The common lot sizes are: The initial margin required to open a position equals the position divided by leverage: The free margin is the amount available on your account to open new positions.
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