FX FAQ
What is FX trading?
Forex trading is the simultaneous buying of one currency and the selling of another. The forex market is considered an over-the-counter market due to the fact that there is no exchange or central clearing house to support the transaction. In retail forex, currencies are generally traded through a broker or dealer, and are traded in pairs. Currencies are typically traded in lots (100,000 units = standard lot) and changes in quotes are measured in pips (the smallest whole fraction of an exchange rate).
Why trade currencies?
Currencies are traded for hedging, investing and speculative purposes by individuals, businesses, investors, commercial and investment banks, governments, and central banks. Corporate treasurers and some institutional investors have currency exposures during the regular course of business that are met through transaction in foreign exchange markets. Individuals and organizations also exchange currencies whenever they require foreign goods or services.
What are the most commonly traded currencies?
The most commonly traded currencies are: USD, EUR, JPY, GBP, CHF, CAD and AUD. The most commonly traded currency pair is EUR/USD. These currencies when paired together feature the greatest amount of liquidity and lower spreads than that of other currencies or when paired with minor or exotic currencies.
What are the “majors,” “minors” and “exotics”?
The following currencies are considered “majors” because they are frequently traded and feature strong liquidity: USD, EUR, JPY, GBP (Sterling or Cable), CHF (Swissi), CAD and AUD (Aussi). Minors include the NZD (Kiwi), SEK (Sweden Krona), NOK (Norway Krone), and DKK (Denmark Krone). Other currencies are considered “exotics” because they are not broadly traded.
How is FX trading different from stocks or futures?
Forex trading features deep liquidity, high leverage, and extended market hours. With stocks, the maximum leverage is 2:1 but forex trading on the TradeMavenFX trading platform allows up to 100:1 leverage in certain pairs depending on order size. There are also no commissions, brokerage fees, exchange fees or government fees (brokers are compensated through the bid/ask spread). Forex trading differs from futures trading in that there is no fixed lot size. In the futures markets, lot or contract sizes are determined by the exchanges but in spot forex you can trade lots as small as 10,000 units of currency.
Finally, the majority of forex trading occurs in the seven major currencies. By contrast, NYSE Euronext has approximately 8,500 listed issues and another 3,800 are listed on the NASDAQ. Forex trading features fewer traded instruments and can be easier to follow than equities. The TradeMavenFX trading platform provides technical analysis tools and news to support traders in their decisions.
What is spot?
A spot forex trade is the immediate execution of one currency against another at an agreed rate. The settlement date for these transactions is typically two business days later. Non-deliverable (retail) forex trading positions are automatically rolled nightly to avoid physical delivery of currency.
What is a “not for delivery” (NFD, or non-deliverable) transaction?
Non-deliverable forex contracts do not require physical delivery of cash, but instead settle on the contract-for-difference basis at the time when the initial market position is closed. If positions are held overnight, a procedure is performed that moves the settlement date to the next business day to avoid currency delivery. Retail traders engage in non-deliverable transactions, while institutional traders such as companies and banks use deliverable contracts to meet currency requirements and hedging objectives.
What is a currency pair?
Currencies are priced in pairs, and all trades require the simultaneous purchase of one currency and sale of another. For example, the currency pair Euros versus US Dollars is expressed as EUR/USD. The first currency (EUR) will be bought (long position) while the other currency (USD) is sold (short position).
What is the bid/ask spread?
The bid/ask spread is difference between the bid price and the ask price. The bid price is the price at which the currency can be sold. The ask price is the price at which the currency can be bought. The bid/ask spread differs between currency pairs reflecting the liquidity of various currencies. More common pairs (majors) typically feature the tightest spreads.
What is a “round trip” transaction?
Currency trading is designated "round trip" because the positions will be closed (settled) within the same account and same account currency from which the trades originated.
What is a pip?
A pip (percentage in point) is the smallest value change in a currency pair exchange rate. If the Euro-Dollar currency pair (expressed as EUR/USD) moves from 1.3250 to 1.3251, that is one pip. Generally, this is the fourth decimal place, but be aware that currency pairs involving the Japanese Yen (JPY) are quoted with only two decimal places.
If a sixth digit is present it represents a fractional pip which provides more competitive, transparent and accurate pricing. The TradeMavenFX platform clearly displays prices in fractions of a pip as illustrated below.
When trading foreign exchange, the value of a pip is dependent on two variables – the amount of currency and the currency pair. The pip is how you measure your profit or loss.
What is a roll?
Each foreign exchange transaction implies an assigned value date that is typically two business days after the transaction is executed. For example, positions opened on Monday would have a value date of Wednesday. In retail forex, traders do not take delivery of currencies and therefore settlement must be moved to a future value date for positions held overnight. This process is called the position rollover.
At 5:00pm EST Monday - Friday a position rollover procedure is performed on all open positions for retail accounts.
What is margin?
The term “margin” refers to the amount required to hold or open a position. For example, if the margin requirement is 1% and a trader wishes to buy $1 million USD/JPY, $10,000 USD in margin is required in his or her account (1% of $1 million or 0.01 x 1,000,000 = $10,000).
Due to the relatively small fluctuations in foreign exchange rates (typically less than 1%-2% per day); retail forex trading is typically executed on margin. Trading on margin gives the trader the ability to hold larger positions than the actual account value.
What is leverage?
Margin is often expressed in terms of leverage, which is the ratio of amount used in a transaction to the required deposit. The TradeMavenFX trading platform allows as much as 100:1 leverage for majors and 25:1 leverage for all other currency pairs.
Use of leverage creates the possibility to generate profits quickly, but also increases the risk of rapidly incurring losses. It is important to review the margin thresholds and limitations to determine proper trading strategies that incorporate risk management objectives.
What types of orders can be executed on the TradeMavenFX Trading Platform?
There are a number of basic forex order types that facilitate efficient transactions. The TradeMavenFX trading platform supports multiple order types including market orders, limit orders, stop loss, stop limits, trailing stops, and “if done” orders with qualifiers. The diverse order options allow traders to employ many different strategies to assist in protecting gains and containing losses. A review of order types and how to access them on the TradeMavenFX trading platform can be found in the User Guide located on the trading platform.