WHAT IS FOREX?
Commonly referred to as FX, Forex or Forex Trading, Foreign Exchange is the world’s largest OTC market and one of the most popular trading instruments for CFD traders. The Foreign Exchange markets are the world’s most liquid markets with global turnover in the trillions daily. Foreign exchange markets operate 24 hours a day and only rest on weekends giving traders opportunity to trade whenever it suits them. FP Markets offer all major currency pairs giving some of the industries tightest spreads.1.
How foreign exchange works
The concept of Forex Trading is that a trader will pick the performance of one currency and match it against another. Hence every time you trade you will be long one currency and short another. The first currency in the pair is referred to as the base currency and the second referred to as the quote/counter currency. As an example let’s take a currency pair GBP/USD. Here the base currency GBP is the Great British Pound and the quote currency would be the US Dollar. If we thought that the Pound would strengthen against the US we would then purchase a quantity, let’s say £20,000 of GBP/USD in the hope that it goes up. In this instance we would be long £20,000GBP and be short the equivalent in USD.
The reason foreign exchange markets are so large and liquid is because of the market participants involved. Major traders of FX include Institutional investors, Governments, Central Banks, Global Banks, Hedge Funds, Retails investors and other financial institutes. FP Markets uses some of the world’s largest liquidity providers to give our clients access to these feeds with industry leading spreads.
FP Markets’ FX CFDs are offered at low margin rates starting from 0.5% meaning clients can access leverage as high as 200:1.
Click here for more detailed information on FP Markets’ liquidity.
Example – Buying GBP/USD
Opening the position
You decide to go long on the British Pound against the US dollar. Our quote is 1.5519-1.5521, and you will buy £20,000 at 1.5521.
The value of your position is £20,000 x 1.5521 = £31,042. To open the position there is a 0.5% margin requirement based on the full notional value.
Your margin requirement is therefore 0.5% x £31,042 = £155.21.
While the position remains open, your account is debited or credited to the current tom-next rate. Tom-next is a market swap rate that expresses, in pips, the difference between the interest paid to borrow the currency that is being notionally sold overnight, and the interest received from holding the currency that is being notionally bought overnight.
Closing the position
As you predicted, GBP/USD later rises to 1.5721-1.5723, and you decide take your profits and exit the trade at 1.5721.
Profits and losses
Opening transaction: £20,000 x 1.5521 = £31,042
Closing transaction: £20,000 x 1.5721 = £31,442
Profit on trade: £400
If the price had fallen to 1.5321 and the trade exited at this price then the trader would have lost £400.