FOREX Trading and Currency Trading Education

What is forex trading?
What are the advantages of trading forex and currencies over futures or stocks?
How are foreign currencies priced?
What are the forex margin requirements?
How do I start trading forex?

What is Forex Trading?

Forex trading, also known as FX trading, foreign currency trading, and spot currency trading... is direct access trading of currencies. In the past, foreign exchange trading was limited to large banks and institutional traders but, recent advancements in technology have allowed small traders to take advantage of the many benefits of forex trading using online trading platforms to trade.

What are the advantages of trading forex instead of futures or stocks?

1. Lower Margin

As with futures and stock speculation, a forex trader can control a large amount of the currency by putting up a small amount of margin. However, whereas the margin requirements for trading futures are usually around 5% of the total value of the holding, or 50% of the total value of the stocks, the margin requirements for forex is typically only 1%. I.e. margin required to trade foreign exchange is $1000 for every $100,000.

This means that trading forex, a currency trader's money can play with 5-times as much value of product as a futures trader's, or 50 times more than a stock trader's.


Trading on margin can be a profitable investment strategy, but it's important that you take the time to understand the risks.

You should make sure you fully understand how your margin account works. Be sure to read the margin agreement between you and your clearing firm. Talk to your account representative if you have any questions.

The positions in your account could be partially or totally liquidated should the available margin in your account fall below a predetermined threshold.

You may not receive a margin call before your positions are liquidated. You should monitor your margin balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.

2. Zero Commission and Zero Exchange Fees *

When you trade futures, you have to pay exchange and brokerage fees. Trading forex has the advantage of being commission free. (* 1st-Futures-Broker is compensated for its services through the spread between the bid/ask prices.)

Currency trading is a worldwide inter-bank market that allows buyers to be matched with sellers instantly. Although you do not pay a commission charge to a broker to match buyer up with seller, the spread is usually larger than trading futures. For example, trading a Japanese Yen/US Dollar pair (USDJPY) forex trade would have a 3 point spread (worth $30). Trading a JY futures trade would more likely have a spread of 1 point (worth $10) but you would also be charged the broker's commission. This could be as low as $10 in-and-out for self-directed online trading, or as much as $50 for full-service trading (that may include live assistance, help and advice from the broker). Fees very with higher volume traders usually receiving lower fees than low volume traders, for example.

You need to compare both online forex and your particular futures commission charge to see which 'commission' is greater.

3. Limited Risk and Guaranteed Stops *

Trading futures, your risk can be unlimited. For example, say you thought Live Cattle prices were set to resume their bullish trend in December 2003, just before the discovery of Mad Cow Disease found in US cattle.

The price crashed through the floor, moving limit-down several days in a row. You would not have been able to exit your position and this could have wiped out the entire equity in your account. As the price continued to fall, you would have been liable to find even more money to make up the deficit in your account.

Trading forex through 1st-Futures-Broker.com, you can never lose more than your the funds in your account; you can never have negative equity. As soon as your account reaches zero, our software is guaranteed to exit all your open positions. Although you should be aware that your whole account is at risk if the market moves against you.

The high volume of trades made in the foreign exchange markets means orders are filled quickly, usually within 2 seconds. This allows stop loss orders to be filled very near to the specified price. In fact, we can guarantee that the price you specify is the price you get on your stop!

(* Does not apply during major fundamental announcements or outside normal trading hours.)

4. Automatic Rollover of Positions

When futures contracts expire, you have to plan ahead in order to rollover your trades. Forex positions expire every two days and you need to rollover each trade in order to stay in your position. However, trading software can do this automatically for you, rolling over any open positions you have every two-days.

5. 24-Hour Marketplace

With futures, you can be limited to trading during the few hours that each market is open in any one day. If a major news story breaks out when the markets are closed, which you think will affect your position, you will have no way of getting out of it until the market reopens, possibly many hours away. Forex, on the other hand, is a 24-hour-a-day market. The day begins in New York, and follows the sun around the globe through Europe, Asia, Australasia and back to the US again. You can trade any time you like Monday-Friday. Or you can make the hours you work, your own.

6. Free market place

Foreign exchange is the largest market in the world with an average daily volume of US$1.4 trillion. That is 46 times as large as all the futures markets combined! With the huge number of people trading forex around the globe, it is very hard for even governments to control the price of their own currency - at least for very long.

How are foreign currencies priced?

Forex is always priced in pairs between two currencies. When you make a trade, you simultaneously buy one currency and sell another. And to exit the trade, you must buy/sell the opposite position. For example, you think the price of the Euro is set to rise against the US Dollar. To enter a trade, you buy Euros and sell US Dollars. To exit the trade, you sell Euros and buy back US Dollars. Hopefully, you were correct in your analysis and the exchange rate for EU/USD has gone up, meaning that you get more Euros back than when you bought them, thus making a profit.

An 'open trade' is where the trader has not bought/sold the equivalent amount of currency.

The front currency given on the quote screen is called the base currency. The second currency given on the quote is called the counter or quote currency. The US Dollar is usually the base for quotes as it is the world's largest currency. And the value is expressed as a unit of US$1. For example:

.9300	US/JY	US$ / Jap Yen	93 Yen for every US Dollar
.8000	US/CHF	US$ / Swiss Franc	80 Swiss Francs for every US Dollar
.7700	US/CAD	US$ / Canadian $	77 Canadian cents for every US Dollar

The exceptions are the Euro, British Pound and Australian Dollar, which are quoted as US$'s per foreign currency. For example:

1.220	EU/US	Euro / US$	1.22 US Dollars for every Euro
1.8100	BP/US	British Pound / US$	1.81 US Dollars for every Brit Pound
.7600	AD/US	Aussie Dollar / US$	76 cents for every Australian Dollar

As mentioned above, you do not pay any broker or exchange fees when trading forex. But as with other type of investments (e.g. futures, stocks) you do pay a bid/ask spread. This is the price at which the market maker is willing to buy/sell the base currency in exchange for the counter currency. For example:

US/CAD
Market	.7700
Buy	.7705
Sell	.7695

 

EU/US
Market	1.220
Buy	1.225
Sell	1.230

What are the Forex Margin Requirements?

Forex trading allows you to trade on margin. This means you only need to put up a small amount of money - known as margin - in order to control a large amount of currency. Margin is not a down-payment but a goodwill performance bond. If your analysis is incorrect and money needs to be taken from your account, the margin in your account is used for this purpose. Typically, $1000 in margin is sufficient to control $100,000 of currency. If you open an account with $10,000, then you can control $1 Million of currency!

As an example, you believe the British Pound is about to rise strongly against the US Dollar. You have $10,000 in your account, enough to control $1 million US Dollars. You buy the equivalent of US$1 Million of British Pounds at the bid-price of 1.6500. Three months later, the Pound has soared against the Dollar and the ask is at 1.85.

Buy	$1,000,000	at 1.65	= £606,060.60
Sell	£606,060.60	at 1.85	= $1,121,212.12

Although the Pound has moved up 20% against the US Dollar, you have made $121,212.12 profit (over 1200%) by using only $10,000 in margin.

This leverage is up to five-times that of futures trading, and 50-times as high as stock trading.

(Note: As well as making larger returns on margin, the leverage can make losses equally large as well.

You may not receive a margin call before your positions are liquidated.

You should monitor your margin balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.)

Our trading platform performs an automatic pre-trade check on margin in your account to ensure you have sufficient funds to take on the position, as well as funds needed for other positions you may have. If funds fall below margin requirements, the platform automatically closes all your open positions, which prevents your account ever becoming negative.

How do I start trading forex?

The easiest way to try your hand at trading forex is to open a simulated account with us. You use the exact same platform as our real forex traders, so when you are ready to trade properly, you will be used to the platform.

When you open a simulated forex trading account, you get $50,000 of virtual money to trade with. The platform receives live quotes and your simulated trades use the exact same bid/ask spreads that real traders do. Therefore, the simulated environment is exactly the same as the real trading situation, except you are not risking a cent of your money.

Click Here to start trading forex in a free demo account, with $50,000 of virtual money.