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The Foreign Exchange Market is the most traded market in the world. There is over $ 3.2 Trillion worth of currencies traded worldwide every single day. The three key players in this market are the Banks, Institutions and Individual Investors. The Foreign Exchange trading week kicks-off on Monday morning at 7 am in Australia and it follows the sun westward as the world’s major financial capitals open and close from Tokyo to London and finally New York where trading ends for the week on Friday at 5pm EST. That means that Foreign Exchange market operates 24 hours five days a week. There is no centralized marketplace for Foreign Exchange trading rather currencies are traded over the counter (OTC) in whatever market is open at the time. This is in contrast to some other major markets that you may know such as Stocks, Bonds, Options and more. Every single day there is new economic reports and data that affect the value of individual currencies and cause fluctuations. Foreign Exchange traders attempt to take advantage of fluctuations in the currency markets by buying or selling individual currencies to speculate on the future value of one currency versus the other. An excellent way to familiarize yourself with currency trading is to experience it first hand with the Finodax Simulation account. See how the currency prices fluctuate at all times of the day and how they react during important economic data releases.
In the Financial market currencies are always quoted in pairs, for example EUR/USD or USD/CAD. The first quoted currency is called the base currency and the second is called the counter currency. So back to our example of the EUR/USD pair, then EUR is the base currency and the USD is the counter currency.
When you are buying/selling a currency pair then you are effectively buying the one currency while selling the other. For example, if you BUY GBP/USD then you have bought British sterling and simultaneously sold U.S Dollars. You would enter such a position if you expected the British Sterling to appreciate against the U.S Dollar. Alternatively, if you SELL GBP/USD then you are selling British Sterling and buying U.S Dollars in the expectation that the GBP will depreciate against the USD.
This is the smallest possible movement either up or down of the currency pair. In the EUR/USD pair a movement of 0.0001 is called a pip, in other words it is the fourth decimal place. A movement of 0.0002 of the EUR/USD pair is considered a 2 pip movement. However for all cases where the Japanese Yen is the counter currency, such as the USD/JPY, then a 0.01 movement of this pair called a pip. So there are only 2 decimal places in this case.
In the Foreign exchange market you are able to open and hold market positions that are significantly larger than your account value. The leverage on a standard Finodax account is 1:400, which means that with an account value of $1000 you can open positions up too $400000. However we do not recommend using a very high leverage during your trading as it can exaggerate your profits/ losses. The term margin refers to the minimum account value that you need in order to hold the position, in this case the Margin is ½%, which means that to open a trade of 1 Lot EUR/USD you will need to have at least $500 account value.
The first step in getting started at Finodax is to choose the account type that suits you. There are 4 different account types that you can choose from:
If you have chosen any of the live accounts (first 3 account types) then the next step is to fund your account and you are ready to enter the real market. If you have chosen the practice account then you can immediately begin practicing your trading strategies with the $100000 simulation money.
Every action starts with thought. This is one of the key principles for successful trading. You need a plan of action and a strategy that suits you:
Initially this may sound slightly complicated but there is actually a very simple formula to calculate your return per dollar traded with Finodax. This tool will help you assess whether your strategy is yielding the returns you would like.
R = [1 + P/L] X T -1
R = Return Per Dollar Traded P = Average Profiting Trade L = Average Losing Trade T = Percentage Profit Ratio
Let’s say that you have 20 trades and 12 of them were Profiting trades while 8 of them were losing trades. Your Percentage Profit Ratio (T) would be 12/20 or 60%. If your 12 profiting trades made $9600, then your Average Profiting Trade (P) would be $9600/12 = $800
Now if your 8 losing trades lost $4800, then your Average Losing Trade (L) would be $600.
Now lets apply these results to the formula:
R = [1 + (800/600)] x 0.6 -1 = 0.4
We see from the result that your Return Per Dollar (R) is 0.4 or 40%.This means that according to this example you would earn 0.4 cents per dollar that you trade with Finodax over the long term.
Technical Analysis is one of the main tools in forecasting future market price movements according to the study of historical price movements. Like any other forecasting tool, for example population and weather forecasts, the future predictions can never be 100% accurate. However this is a very useful tool in indicating what is the most probable outcome and helps traders identify how prices may behave in the future. Technical Analysis uses a wide range of charts to indicate price movement’s overtime.
Below is a brief description of some of the most popular technical indicators that are used by traders worldwide on a daily basis:
Instead of using the simple moving average the exponential moving average may also be used. Bollinger Bands are mostly used in comparing price action to the action of other indicators and in pattern recognition. The way traders use Bollinger Bands to determine entry and exit points in the market vary widely.
A record of all financial transactions for an individual or asset.
The amount of money in an account after calculating for any outstanding debt or expenses.
An increase in the real or relative value of a currency, commodity, or asset. For example, if there is an appreciation in the U.S. Dollar against the Euro, Americans can purchase more European goods with the same Dollar amount.
When a specific currency, commodity, or asset is immediately purchased on one market and sold on another market. Occasionally, different markets have valuation differences for the exact same investment. If price disparities are quickly identified, profits can be generated by purchasing the asset where it is cheaper, and then immediately selling it on the market where it is valued higher.
Also referred to as the “offer rate” or “sell rate”, it is the price traders pay when purchasing a currency or commodity from a market maker or financial broker. For example, if the bid-ask spread for the EUR/USD is 1.3494/1.3497, one Euro is sold per for every $1.3497 U.S Dollars.
The distribution of personal funds into various investment types, such as stocks, bonds, commodities, and cash holdings. Asset allocation is often individualized to meet an investor’s specific financial objectives and risk-threshold.
Nickname for the Australian Dollar and AUD/USD currency pair.
The management and support personnel in a financial services company. Their responsibilities may include financial settlements, clearances, record keeping, accounting, and regulatory adherence.
The difference between the value amount of the goods and services a country exports and the value amount of the goods and services it exports to other countries over a specific time period. (Export-Imports=Balance of Trade)
A financial graph consisting of vertical bars and horizontal lines that provide important financial and trading information. This additional information can be useful for traders that utilize a technical analysis strategy.
It is the first currency shown in a currency pair, such as the Euro in the EUR/USD pair. Since the EUR is the base currency in this pair, it is what traders purchase and sell against the dollar.
The smallest calculated price amount when trading currencies.
A financial investor that is generally pessimistic about the market, and believes prices will fall. Bear investors are more conservative when trading.
A general decline in market prices over a specific period of time. Traders are often fearful and pessimistic during these market periods.
The quoted price a broker is willing to pay for a specific commodity or currency from traders. For example, if the bid-ask spread for the EUR/USD is 1.3494/1.3497, traders will receive 1.3494 US Dollars for the sale of one Euro.
Refers to the numbers in an exchange rate price that are left of the decimal point, such as 90.60 in the USD/JPY pair.
Tradable securities that are commonly issued by companies and governments to help raise capital and manage debt. The issuer of a bond will pay the money lender a specific rate on the total borrowed amount throughout the life of the bond. Bonds are typically more stable and less risky than stocks, but it is always wise to read a bond issuer’s prospectus.
An agreement that established fixed foreign exchange rates for major currencies and pegged the price of gold at US $35 per ounce. The agreement lasted until 1971, when a floating rate system of currency valuations was instituted.
An intermediary between buyers and sellers of assets and securities. When an exchange takes place, brokers charge a fee for their services.
A general increase in market prices over a specific period of time. Traders are often optimistic during these financial periods.
The central bank of Germany. Sometimes referred to as “Buba”.
Nickname given to the British Pound Sterling and the GBP/USD pair.
A financial chart with vertical bars and lines that represent an asset’s trading range, opening price, and closing price. This graph provides more information than standard financial graphs, and is often used for technical analysis.
The main bank of a country that is administered by the government. The Federal Reserve acts as the central bank in the United States. In order to avoid political clout on fiscal policy, the Fed is only partially administered by the U.S. government. It is responsible for broad monetary policies that include banking regulation, influencing credit conditions, preventing inflation, and maintaining economic stability.
A market analyst or technician that attempts to predict future market behavior based on historical charts and financial data. Chartists are also called Technical Traders, and have varying levels of successful predictions.
An uncommon event when there is no difference between the purchase price and the sales price of a currency pair. For example, the Bid-Ask spread for the EUR/USD would be 1.3494/1.3494 during a choice market. This rare event is advantageous for traders.
The successful trade settlement between a buyer and seller of an asset.
Any assets owned by an individual or institution receiving a loan that is contractually pledged to the lender in the event of a loan default.
The fee a broker charges a client upon the completion of a successful financial transaction. Commission fees can vary based on the policies of each brokerage firm or individual broker.
A document with written acknowledgment that a securities trade successfully occurred. The confirmation contains important details about the trade, and is often delivered to an investor within a few days time.
When economic instability in one country creates a domino effect, adversely affecting the health of other economies.
1.A unit of trading in options and futures.
2. A legal document between two or more parties.
Any active participant in a financial transaction or contract, such as intermediaries, brokers, banks, and financial institutions.
The financial and political risks associated with securities and financial trading with foreign countries.
The exchange rate of currency pairs that use foreign currencies. For example, since trading the Turkish Lira and Japanese Yen in the United Kingdom does not include the British Pound, their exchange rate is called the cross rate.
Coins and notes that are in circulation, generally accepted, and usually issued by a presiding governmental body for a specific country or region. Currency acts as a basis for most trade.
The risk of financial loss due to an unfavorable foreign exchange rate between countries. For example, U.S. investors that currently have shares in Russian companies would be adversely impacted by the deprecation of the Ruble against the Dollar.
Buying and selling asset positions on the same trading day. People involved in day trading are sometimes referred to as active traders or day traders.
A decrease in the real or relative value of a currency, commodity, or asset. For example, if the U.S. Dollar depreciates against the Euro, Europeans can purchase more American goods with the same Euro amount.
Financial instruments whose values are determined by underlying events and conditions. Derivatives involve a contract between two or more parties, and can help mitigate risk.
The depreciation in the relative value of a currency when compared with another currency or valuable commodity. This decreased valuation is sometimes caused by government decisions.
An important statistic about an economy. This information allows for an in-depth technical analysis of past and current financial performance, and can also help experts determine future economic trends. Economic indicators can include the unemployment rate, the Consumer Price Index, industrial production, and Gross Domestic Product.
An order to buy or sell an asset at a specific market price. If the asset price never meets the parameters of the ordered request, the order is cancelled at the end of the trading day.
The currency that is used in most European countries. Also refers to the EUR/USD currency pair.
The central bank that is responsible for monetary policies that affect the Euro currency. Located in Frankfurt, Germany, it is considered one of the largest and most important central banks in the world.
A group of participating European countries that launched the Euro currency on January 1st, 1999 as an alternative to their local currencies. In accordance with the monetary agreement among the participating countries, all national currencies were phased out by January of 2002. The Euro allows for competition with the U.S. Dollar and the Japanese Yen, and makes business and trade within the European Zone more efficient. Participating members include Ireland, Portugal, Spain, France, Italy, Greece, Slovenia, Austria, the Czech Republic, Germany, Belgium, the Netherlands, and Finland.
A United States government corporation that provides deposit insurance for account holders. People that have assets in financial institutions that are members of this organization, have a maximum of $250,000 that is insured by the Federal Government.
A part of the Federal Reserve that influences short-term interest rates through money-supply decisions.
The central bank of the United States. It is also referred to as the “Fed”.
Having no position in the Foreign Exchange.
The world’s largest financial market that allows for the trading of different currencies. It is commonly referred to as FX, Forex, or the currency market.
When two or more parties agree to exchange currencies at a pre-assigned rate and a specific time. Each party believes the transaction will be to their advantage. Forward contracts do not involve intermediaries, so buyers and sellers execute transactions independently.
The pips added to or subtracted from the current spot rate to calculate a forward price.
A comprehensive review of financial statements, historical charts, and economic conditions related to a stock or security, which can help predict future performance.
An agreement to buy or sell an asset at a pre-assigned date and price. Unlike Forward contracts that take place between buyers and sellers directly, futures contracts are traded on financial markets. Agricultural commodities are often traded with this type of contract.
An order to buy or sell a security when it reaches a specific price. GTC orders will continue to stay active after the end of a trading day until the security reaches the target price.
An investment strategy to mitigate financial loss due to price instability, economic volatility, or unforeseen fiscal events. For example, farmers occasionally hedge their crop prices in order to avoid the possibility of a decreased return due to an overabundance of crop. Hedging can also result in decreased returns.
A general increase in the prices of goods and services in an economy, causing the purchasing power of the currency to decrease.
The minimum collateral amount that is required to purchase a security on margin.
The exchange rates that major financial institutions pay each other when converting currencies. Since the inter-bank market involves high volume and liquidity, the bid-ask spreads for currencies are very small.
A comprehensive review and analysis of various indices and reports that help predict future economic performance.
London Inter-Bank Offer Rate. LIBOR rates are often used as a reference for inter-bank loans and many other global financial instruments.
An order to buy a specific number of security shares or a currency amount at or below a particular price, or an order to sell a specific number of security shares or currency amount at or above a particular price.
1.) High trading volume associated with limited price volatility.
2.) The ability to quickly convert an asset into cash while retaining value.
To own a stock or other security with the expectation that share prices will rise.
The required collateral that investors must deposit in order to insure some or all of the financial risk being taken by a broker or financial institution.
To purchase some or all of a security with the funds from a broker or financial institution. These purchases require collateral on the part of the investor, and magnify gains and losses.
When the amount in a margin account is below the required level. If traders do not deposit additional collateral into the margin account, the broker is allowed sell their securities to meet the minimum margin requirement.
An accounting method that records an asset based on its fair market value. For example, the price of an asset during times of economic disruptions or high illiquidity might be discarded when valuating that asset’s worth
Brokers, dealers, and financial institutions that continuously buy and sell high trade volume. Trading currency pairs generates revenue through the bid-ask spread.
The possibility of poor market performance resulting in decreased investment value.
Also referred to as the “ask rate” or “sell rate”, it is the price traders pay when purchasing a currency or commodity from a market maker or financial broker. For example, if the bid-ask spread for the EUR/USD is 1.3494/1.3497, one Euro is sold to the trader for every $1.3497 U.S Dollars.
A type of order with multiple parts. If one part of the order is completed, the other parts of the order are automatically cancelled.
An order to purchase or sell a security that stays active until it is either executed or cancelled.
Any asset or security in a financial market that is currently owned by a trader, and has yet to be liquidated into cash holdings.
The buying and selling of foreign currencies during nighttime hours, when domestic markets are closed.
Securities that are directly traded between two parties and not on a market or exchange. Over the counter securities are sometimes referred to “unlisted stocks”, and are subject to higher risk.
The smallest rate amount that is counted when valuating currency pair prices.
The possibility that investors will experience poor financial performance or loss as a result of government behavior or intervention.
The current value amount of a security, currency, or commodity owned by a trader that continues to be open and actively traded.
In the currency markets, the difference between a futures price and the spot price.
Detailed price information that is available to market participants and the general public. Price transparency provides buyers and sellers with important information that makes for an efficient capitalistic system.
The current bid-offer prices for currency pairs in the Foreign Exchange Market.
The relative value of one currency against another currency.
A term used in technical analysis that refers to a specific price level for a commodity or security when traders are expected to sell. When more traders sell than buy at the resistance level, asset prices decrease.
An appreciation in the relative value of a currency when compared with another currency or valuable commodity.
The possibility of loss when making an investment. Risk can be calculated, yielding bigger gains when the outcomes are positive.
Limiting the possibility of financial loss in an investment. This is done by identifying adverse scenarios before they occur, and implementing procedures and policies to alleviate risk.
When the settlement of a deal is rolled forward to another value date. The cost of this process is based on the different interest rates of the two currencies involved in the transaction.
The completion of a financial transaction that often involves the deliverance of a security for monetary payment. These exchanges must be executed in accordance with contractual obligations.
To short sell a security, thereby profiting when security prices decrease in value.
The difference between how much it costs to purchase a specific currency, and the amount traders receive when selling that same currency. For example, the EUR/USD currency pair might have a “Bid” quote of 1.3494 and an “Ask” quote of 1.3497. This specific currency pair has a Pip spread of three.
Also known as the pound sterling or British pound. It is the currency used in the United Kingdom.
A type of order that is automatically executed when a security’s price declines to a pre-assigned level set by the trader. People who are unable to constantly watch their positions often use this order, which tells the broker to automatically sell a security without additional trader involvement.
A term used in technical analysis that refers to a specific price level for a commodity or security when traders are expected to buy. When more traders buy than sell at the resistance level, asset prices increase.
The exchange of one currency for another currency of the same value. This transaction involves two parties.
The study of past financial statistics and indices to predict future market performance.
A fee incurred by a trader when buying or selling a security.
The time a transaction order occurs.
The total trade volume of all executed transactions over a certain period of time.
The bid price and ask price that traders pay brokers when purchasing or selling a specific currency on the Foreign Exchange Market.
An increase in a stock price or a security transaction price.
A rule adopted by the SEC in 1938 that prevents traders from short-selling a security unless it is on an uptick. This regulation prevents groups of traders from manipulating market prices, which can result in large sell-offs.
The interest rate that most commercial banks use in the United States when lending to credit worthy institutions.
The date both parties agree to finalize a transaction by exchanging assets. For example, the settlement of a spot currency transaction takes place two days after the agreement.
An additional margin requirement that traders need to pay a broker when there is market volatility and price fluctuations.
Constantly changing prices associated with limited predictability.
A term used for markets with extreme price fluctuations.
A term sometimes used for one billion currency units.