Its time to know how you can enter in a trade with a broker as per your need or convenience. Its called Forex Order. Two main types of orders are.
Market Order: is an order to buy or sell at the current market price. The execution of the transaction is immediate at whatever market price that holds for the time. Most of the trading is done in Market order. You give the currency pair and the amount you want to invest to the broker and he gives you the bid and ask price. Once confirmed the trading is done immediately.
Limit Order: is an order placed to buy or sell at a certain price. Say if you want to buy a particular currency pair at a particular price all you have to do is instruct the broker about the deal size and at what price would you like to execute the trading. You might also have to give the time till which you want the deal to remain active considering the fact that the market is open 24hrs.
Some other types of orders include.
GTC: That is Good Till Cancelled. That is cancelled by you. This order remains active until it is cancelled by you i.e. the trader.
GFD: Good for the day order remains active for that particular day. Usually a particular time will be quoted by the broker which would mean the end of that day.
Stop Order: it is an order to buy or sell at a certain price. The main difference between a limit order and a stop order is that stop orders are usually used to limit loss potential on a transaction whilst limit orders are used to enter the market.
Example: Trader A Buys EUR/USD 10'000 @ 0.9360, he's expecting a 60 to 70 pip move in the market but he wants to protect himself in case he has overestimated the potential strength of the Euro. He knows that 0.9330 is a support level so he places a stop loss order to sell at that level. Thus on this particular trade he limits his loss to 30 pips.
OCO: Order cancels order- is a mixture of 2 limit and/or stop orders.
Example: If the current market rate of EUR/USD is 0.9350 and trader wants to buy if the price goes to 0.9395 but he would like to sell if it drops to 0.9310. The understanding is such that at 0.9395 the trader will buy and the order to sell automatically stands cancelled.
Sunday, October 25, 2009
Friday, October 23, 2009
Monday, October 5, 2009
Leverage and how it works
Unless you have a really high sum of money to invest in FOREX market, you would want to know what is leverage and how does it works. With leverage Forex trader can make large amounts of money without having a large trading account. Its basically Virtual money you would be using to trade. Say for eg. a broker offers you a leverage of 100:1 , what it means is that while you would be investing 1$ of your hard cash there would be an actual investment of 100$ in the forex market i.e. 100times of whatever you invest. Thus, funding your account with $1000 at 100:1 leverage would enable you to operate a $100, 000 account.
If you had 400:1 leverage and took control of $100,000 with only $250, with positional of just 1%, you would make an amazing $1000 (1% increase!). Sounds quite interesting, 400% profit, isnt it? Then why is leverage called a double edged sword? Now imaginge a 0.25% decrease which is quite usual with forex market, and you loose all of your 250$.
While it is possible to make profits with virtual money in Forex, it is absolutely impossible to lose virtual money, you lose only real money that you have invested or earned as a result of profitable trading. Considering the profits involved leverage is worth the risk. If it works for you, you would be making 100times profit; if it doesnt your broker might simply freeze your account until you pay up for the margin.
Brokers offer different levels of leverage. Some may offer leverage as low as 40:1 while some may offer upto 400times.
If you had 400:1 leverage and took control of $100,000 with only $250, with positional of just 1%, you would make an amazing $1000 (1% increase!). Sounds quite interesting, 400% profit, isnt it? Then why is leverage called a double edged sword? Now imaginge a 0.25% decrease which is quite usual with forex market, and you loose all of your 250$.
While it is possible to make profits with virtual money in Forex, it is absolutely impossible to lose virtual money, you lose only real money that you have invested or earned as a result of profitable trading. Considering the profits involved leverage is worth the risk. If it works for you, you would be making 100times profit; if it doesnt your broker might simply freeze your account until you pay up for the margin.
Brokers offer different levels of leverage. Some may offer leverage as low as 40:1 while some may offer upto 400times.
FOREX TERMS
To start with forex you need to know about certain terms. Well there are lots of terms to know but I would be putting down a few important ones over here. Certain terms are self explanatory which shouldnt be difficult to understand.
Trader- Thats you.
Market maker, dealer, broker are the ones you gonna deal with.
Spread is the difference between the buy and sell price i.e. ask and bid. The bid represents the price at which the forex market maker is willing to buy the base currency in exchange for the counter currency . Conversely, the ask price is the price at which the forex market maker is willing to sell the base currency in exchange for the counter currency. This is the difference between the market makers selling price and the price the market maker is ready to pay to buy the same currency. This means that if you buy a currency and then sell the currency before the price has changed you will lose money because of the spread. Bid price is always lower than the ask price, thus the situation. Forex prices are always quoted using five numbers; so, for this example, let's say we had a USD/CAD bid price of 120.00 and an ask of 120.05. Thus, the spread would be equal to 0.05, or $0.0005.
Pip- I EUR/USD bid/ask is 1.3121/1.3125 then by selling the security before the price has changed, you will lose 5 pips. If you understand the example you would notice that the currency rates do not change a lot so the changes are quoted in pips. The smallest upward or downward price movements quoted in forex. A movement of 0.0001 is one pip (for example, from 140.005 to 140.004 euro). But for Japanese YEN, a movement of 0.01 is one pip (for example, from 116.32 to 116.31 yen).
Quote- Price of a currency is called quote. There are two types of quotes Direct Quotes and Indirect Quotes. Direct quote is the price for 1 US dollar in terms of the other currency. Indirect quote is the price of 1 unit of a currency in terms of US Dollars. Quote is provided by the market maker(the dealer) to the investor.
Cross Rate- When quote is not put against US dollar but against another currency, say GBP/USD- 1.7315
Margin- deposit required to open or maintain a position. Basically a security in case you incur losses. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade. Your margin will always be the agreed percentage of the value of the transaction that you make.
Leverage - The ratio of margin to the maximum position size. With a deposit of $5000 and a leverage of 50, you are able to operate a face value of $250,000. Leveraging allows you to profit quickly, but lose money just as fast. Leverage gives a trader the ability to increase the potential return on an investment. Leverage works both ways however; and it also increases potential risk. Therefore leveraging magnifies both gains and losses. Leveraging a position involves putting down margin, to take on a position that is larger in value. I'l need to put down a whole new post explaining how leverage works.
Trader- Thats you.
Market maker, dealer, broker are the ones you gonna deal with.
Spread is the difference between the buy and sell price i.e. ask and bid. The bid represents the price at which the forex market maker is willing to buy the base currency in exchange for the counter currency . Conversely, the ask price is the price at which the forex market maker is willing to sell the base currency in exchange for the counter currency. This is the difference between the market makers selling price and the price the market maker is ready to pay to buy the same currency. This means that if you buy a currency and then sell the currency before the price has changed you will lose money because of the spread. Bid price is always lower than the ask price, thus the situation. Forex prices are always quoted using five numbers; so, for this example, let's say we had a USD/CAD bid price of 120.00 and an ask of 120.05. Thus, the spread would be equal to 0.05, or $0.0005.
Pip- I EUR/USD bid/ask is 1.3121/1.3125 then by selling the security before the price has changed, you will lose 5 pips. If you understand the example you would notice that the currency rates do not change a lot so the changes are quoted in pips. The smallest upward or downward price movements quoted in forex. A movement of 0.0001 is one pip (for example, from 140.005 to 140.004 euro). But for Japanese YEN, a movement of 0.01 is one pip (for example, from 116.32 to 116.31 yen).
Quote- Price of a currency is called quote. There are two types of quotes Direct Quotes and Indirect Quotes. Direct quote is the price for 1 US dollar in terms of the other currency. Indirect quote is the price of 1 unit of a currency in terms of US Dollars. Quote is provided by the market maker(the dealer) to the investor.
Cross Rate- When quote is not put against US dollar but against another currency, say GBP/USD- 1.7315
Margin- deposit required to open or maintain a position. Basically a security in case you incur losses. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade. Your margin will always be the agreed percentage of the value of the transaction that you make.
Leverage - The ratio of margin to the maximum position size. With a deposit of $5000 and a leverage of 50, you are able to operate a face value of $250,000. Leveraging allows you to profit quickly, but lose money just as fast. Leverage gives a trader the ability to increase the potential return on an investment. Leverage works both ways however; and it also increases potential risk. Therefore leveraging magnifies both gains and losses. Leveraging a position involves putting down margin, to take on a position that is larger in value. I'l need to put down a whole new post explaining how leverage works.
Saturday, October 3, 2009
Understanding FOREX
All currencies around the world are assigned a three letter code, such as USD for United States Dollars, EUR for the Euro, or GBP for the British Pound. The four most common currency pairs that dominate the Forex Market are:
Euro vs US Dollar USD vs Swiss Franc USD vs British Pound USD vs Japanese Yen
Trading is done in combinations called a "cross."A cross is formed by combining the codes for the two currencies you are working with, forming a 6 letter combo such as EURUSD. When doing a combo, the more expensive currency is listed first. The currency that is listed first is called the Base Currency and its value is always 1. The US dollar is the centerpiece of the FOREX market and is normally considered the 'base' currency for quotes except in case of GBP, AUD & EUR.
After the cross, you will see a number. For example, if you saw GBPUSD=1.821 (GBP is the base currency over here), it means that it takes 1.821 US dollars to equal 1 British pound. When a rate changes, it is displayed in bold print, so a change from 1.821 to 1.825 would equal a move of 4 points. Simply stating that now 1GBP can buy you more of US dollars.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same.
The goal is to invest in a currency that appreciates in value in relation to the other currencies, or simpy put it as... buy low - sell high.
WHY FOREX
Unique factors of Forex (FX) Trading
- Volume of the trading that happens in the market.
- The liquidity factor. Currency determines the liquidity.
- Trading hours. The market is open for 24 hours a day.
- High Leverage Margin
- Low margin of profit compared to other investments and trading. But the return on investment increases on the volume of the trading.
Advantage FOREX
Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - real time- day or night.
The FOREX market is considered an Over The Counter (OTC) or 'interbank' market. This is because the transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange compared to stocks and futures markets. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets. Though FOREX trading is done 24hrs the reference for FOREX trading is that it begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York.
The FOREX market is considered an Over The Counter (OTC) or 'interbank' market. This is because the transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange compared to stocks and futures markets. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets. Though FOREX trading is done 24hrs the reference for FOREX trading is that it begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York.
Stock Market Vs Forex Market
FOREX is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Rupees (USD/INR). So basically, FOREX is trading of currencies.
Stock market or as also known as equity market is a place where shares of companies are traded either through exchanges or over-the-counter mechanism. Share is a slice of ownership in the company and traded in stock market at mutually agreed upon price based on the company's future performance.
Stock market or as also known as equity market is a place where shares of companies are traded either through exchanges or over-the-counter mechanism. Share is a slice of ownership in the company and traded in stock market at mutually agreed upon price based on the company's future performance.
INTRODUCTION
Forex stand for Foreign Exchange, the market in which currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day more than three times the aggregate amount of the US Equity and Treasury markets combined. . Forex market provides high degree of leverage upto 1:400. Unlike other financial markets, the Forex market has no physical location and no central exchange (off-exchange). It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers. Currently in India Forex trading is not in main stream but slowly it is gaining momentum.
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