Welcome to the first in this short FX Education series, aimed at introducing new investors to the basic concepts of FX trading. In this series we define basic FX Terminology.

#1: Basic FX Terms



What is the FX market?

The online trading environment for foreign exchange encompasses the largest, most dynamic capital market in the world with more than $1.5 trillion traded daily. The FX market is a continuous, 24/5 marketplace open from Sunday afternoon (4 PM EDT) through the close of the US markets on Friday (5 PM EDT). The FX market is where investors can trade one currency against another currency.

What is a currency cross?

Currencies are always priced in pairs. All trades take place between two different currencies resulting in the concurrent purchase of one currency and sale of another. For example, when you trade EUR/USD, the currency cross is Euros versus US dollars. One currency will be bought (long position) while the other currency is sold (short position).



What is the Bid-Ask Spread?

The bid-ask spread is the buying and selling spread between two currencies. The bid price is the price at which the currency is sold. The ask price is the price at which the currency is bought. The difference between the bid price and the ask price is known as the bid-ask spread. The bid-ask spread differs between currency crosses with more common crosses (majors) having tighter spreads.

Welcome to the second in this short FX Education series, aimed at introducing new investors to the basic concepts of FX trading. In this edition, we describe what a PIP is.

#2: What is a Pip

Defining a Pip



Currencies are quoted using 5 significant digits. The last digit, called a "pip", represents the smallest potential move in an exchange rate, and is very similar to ticks or points in other financial products. In the example above, a 10 pip increase in the Ask price would result in a quote of 1.2287. Likewise, a 10 pip decrease in the Ask price would result in a quote of 1.2267. Half-pips are a more recent development offering traders even tighter spreads and more competitive and transparent accuracy in pricing. When trading foreign exchange, the value of a pip is dependent on two variables: the amount of currency and the currency pair.

USD Value of a Pip

Below, we have calculated the US Dollar value of a 1 pip movement for some of the more frequently traded currency pairs. Please note, all values are calculated using 100,000 units of the base currency (the left-hand currency in the pair).

• EUR/USD = $10.00
• USD/CHF = $8.00
• USD/JPY = $9.06
• GBP/USD = $10.00
• USD/CAD = $7.92
• AUD/USD = $10.00
• EUR/CHF = $8.00
• EUR/JPY = $9.06
• EUR/GBP = $17.98

Welcome to the third in this short FX Education series, aimed at introducing new investors to the basic concepts of FX trading. In this edition, we describe the basic types of FX trade.

#3: Types of FX Trades



What is Spot?

A spot FX trade is an immediate execution of one currency against another at an agreed rate, settlement of which traditionally takes place two business days later. Client Station offers spot trading on streaming real-time prices for over 120 different currency crosses, with deep liquidity on the most liquid currency pairs.

In the FX Trade module, if the Bid/Ask fields are highlighted green, then the platform is delivering a live-tradable price. To execute the spot trade simply click the 'Enable' button to buy or sell the currency immediately.



What is a Forward Outright?

A Forward Outright is a trade that will commence at an agreed upon date (in the future). There is no centralized exchange for Forwards and forward trading is often customized to meet the needs of the buyer and seller. Forward Outrights are expressed as a price above (premium) or below (discount) the spot rate. The forward FX price is the sum of the spot price and the margin. This price is a reflection of the FX rate at the forward date where if the trade were executed at that rate there would be no profit or loss.

Welcome to the fourth in this short FX Eduction series, aimed at introducing new investors to the basic concepts of FX trading. In this edition we describe trading on margin.

#4: Trade on Margin

Defining Margin

Trading on margin means that an investor can buy and sell assets that represent more value than the capital in their account. Forex trading is typically executed on margin, and the industry practice is to trade on relatively small margin amounts since currency exchange rate fluctuations tend to be less than one or two percent on any given day.

Margin, or leverage, implies that the investor is "gearing" his or her funds. Margin rates of 1% on the first $25,000 in your account, and 2% on assets greater than that, are common in online trading. What this means is that a margin of 1.0% enables one to trade up to $1,000,000 even though there is $10,000 in the account. In terms of leverage this corresponds to 100:1, because 100 times $10,000 is $1,000,000, or put another way, $10,000 is 1.0% of $1,000.000.



Margin is a powerful accelerator

Using leverage opens the possibility to generate profits quickly, but increases the risk of rapidly incurring large losses. It is important to review the margin thresholds and limitations in your trading agreement to determine the range of trading activities you can undertake.

Net Equity for Margin

This term is the absolute indicator of the extent of margin capability in your account. If your Margin Required exceeds your Net Equity for Margin you must close or reduce positions, or send additional funds to cover your positions.

Trading on Unrealized Profits

You can trade on unrealized profits in your account. Margin calculations are based on the Net Equity for Margin which includes such unrealized profits and losses as are current in your account.

Margin call

Traders must maintain the margins listed in their account at all times. If funds in an account fall below the margin requirement, a margin call is issued. A margin call requires the trader to immediately deposit more funds to cover the position or to close the position.

Trade size

The amount of the trade size is limited by the margin position. For example, a trader with $10,000 in funds and 1% margin, can trade as much as $1,000,000; however taking a single position in this amount would be extremely unwise and generate a margin call if the trade were to tilt slightly.

Majors, Minors and Exotics

Margin rates vary according to the liquidity (available inventory) of different currency crosses. Lower rates apply to Majors, higher rates to minors, and then highest margin terms for exotics.

Weekend rates

On weekends, when the markets are quiet, the rate is normally doubled to 2% and 4% respectively as liquidity is considerably limited.

Welcome to the 5th in this FX Eduction series, aimed at introducing new investors to the basic concepts of FX trading. In this edition we describe the different types of FX trade order.

#5: Margin FX Order Types



Order Types

The basic landscape in FX trading involves a number of order types that facilitate efficient transactions. Below, we have defined several of the most common terms.

1. Limit

A limit order is commonly used to enter or exit markets at a specified price or better than the market price. In addition, a limit order allows the trader to manage the length of time that the order is current or outstanding before it is canceled.

2. Stop

Stop orders to buy are placed above the current market price and Stop orders to sell are placed below the current market price. If the Bid price for sell orders or Ask price for buy orders is hit or breached in sufficient size, the order will be filled as soon as possible at the price obtainable market.

3. Stop if Bid

A Stop if Bid order is used to buy or sell a currency is the Bid price breaches the specific level in the price field. Typically, Stop if Bid orders are used to buy a FX position in order to make sure a certain level is broken.

4. Stop if Offer

A Stop if Offer order is used to buy or sell a currency is the Ask price breaches the specific level in the price field. Typically, Stop if Offer orders are used to sell a FX position in order to make sure a certain level is broken.

5. One Cancels Other (OCO)

This most common linked order, OCO, stipulates that if one part of the order is executed, then the other part is automatically canceled. In FX trading, OCO often refers to a buy order and sell order linked together so that when one of the orders is executed, the other is canceled. Consider the OCO as follows: the trader protects an existing position from loss (stop order) and ensures that profits are taken (limit order).

6. If Done (ID)

These contingent trade orders, also known as slave orders become active only if the primary order is executed first. An example would be a working order to buy EUR/USD at 1.2500 and a contingent order to sell at 1.2400 Stop if Bid -- if the first order is done.

Welcome to the sixth in this short FX Eduction series, aimed at introducing new investors to the basic concepts of FX trading. In this edition we describe Tom-Next rollovers.

#6: Tom-Next Rollovers

Tom-Next

Spot Forex positions are traded with a standard Value Date of 2 business days - the theoretical delivery date for the currency exchange if we were going to take delivery of a currency. For example, positions opened on Monday would have a Value Date of Wednesday.

As we are speculating on Forex and not actually taking delivery (settlement), positions are never allowed to reach their Value Date and are 'Rolled Over' to a new Value Date instead. So if the position we opened on Monday is still open on Tuesday, it will be closed then reopened again immediately at almost the same market price with the new Value Date of Thursday.

Sample of Tom-Next Rollover Report:


Financing Charge/Credit

When a position is rolled over to a new Value Date any profit or loss associated with that position is also rolled over to the new position but a small component of interest on the profit or loss is added or deducted from the opening price of the new position.

Swap Price

To summarize, Spot Forex positions held past the end of a trading day (4 PM CST) are rolled over to a new Value Date. At rollover, the position is closed and reopened with a small difference between the closing and the reopening price. This small difference is called the swap price and includes:

• The Rollover charges principally account for the interest rate differential between the two currencies traded
• The Financing credit/charge from any profit/loss on the position

Some typical swap rates are (Long position/Short position as of 11/08/04):

• EURUSD 0.000011/-0.000028
• USDJPY -0.0038/-0.0070
• GBPUSD -0.000114/-0.000169
• USDCHF -0.000023/-0.000058
• EURCHF -0.000038/-0.000086
• AUDUSD -0.000054/-0.000077