Forex Education
What is Forex
Complex trades and little chance to diversify are some of the factors that often make trader's lives difficult, driving them towards new instruments and new markets in order to continue to work profitably under all markets circumstances. In this context Forex market is undoubtedly the most interesting.
The Forex market also known as FX is the largest financial market globally: daily volumes can reach 3,200 billion dollars (almost 30 times the daily volumes of U.S. markets) and the large majority of the transactions are made purely based on speculation goals.
This happens mainly because the foreign exchange market includes all the others:
any financial instrument and every transaction that takes place through the exchange
of foreign currency, contributing to the formation of an exchange rate.
As a result, when negotiating on a future or an action, sooner or later a trader
will have to deal with the currency that expresses his purchasing power.
Starting from this simple observation we can find different approaches to the Forex market: trading, hedging, speculation.
Therefore, it is not surprising that the Forex market is the largest in the world, in fact it is approximately 50 times greater than the global shares market.
In recent years, accompanied by the irrepressible growth in volumes traded, the knowledge of this kinds of operations has increased in Cyprus. The number of players has also increased as more intermediaries are allowed to provide foreign exchange services and brokerage and, as the economy shows, the competition has improved operating conditions.
The advantages of trading on Forex
The foreign exchange market consists of various instruments including spot, forward and future. Traders do prefer the former for different reasons, such as:
- 24 hours liquidity
- no commission
- high leverage
The volumes of Forex
It is difficult to accurately estimate the volumes of an unregulated market, such as Forex. The only official institution which regularly collects published data provided by major global central banks is the Bank for International Settlements.
Over the past four decades, the volumes of the forex market continued to grow exponentially making it the largest and most liquid market in the world.
The average daily volume of transactions OTC (Over TheCounter) can be estimated at about 3,200 billion U.S.dollars. Compared to the survey made by the Bank for International Settlements in April 2004, when the average daily volume of transactions amounted to 1900 billion U.S.dollars, volumes have grown as much as 71%.
The factors that led to this growth are investor interest which has identified the Forex market as a profitable alternative to fixed-income and stock markets, and the increased importance given by hedge funds and asset managers.
Trading Example
An investor deposits €10,000 in an AFX Capital Markets Trading Account.
The account is set to a requirement of a 0.5% margin or 200:1 Leverage. This means
that for every 1 lot (1 lot= 100,000) opened, the investor must maintain at least
€500 in Margin (= € 100,000 x 0.5%).
The investor expects the EUR to rise against the US dollar and therefore decides
to buy € 100,000 of the EUR/USD pair.
The market quotes EURUSD 1.2728-1.2730. The investor buys EUR at 1.2730 against
USD.
By doing this, he commits in the simultaneous buying of EUR 100,000 (1 lot) and
the selling of USD 127,300 (= €100,000 x 1.2730) by using €500 as a Margin (= €100,000
x 0.5%) and borrowing EUR 99,500 from AFX Capital Markets (= €100,000-€500)
- Transaction Flows Report — Day 1
| Account Name | Credit/Debit | Day 1 | Comment |
|---|---|---|---|
| EUR Account | C | EUR +100,000 | €100,000 Investment |
| USD Account | D | USD -127,300 | # lots (1) x lot value (100,000) x EURUSD Quote (1.2730) |
- Client Account Report – Day 1
| Balance (EUR) | Equity (EUR) | Lots Open # | Used Margin (EUR) | Usable Margin (EUR) |
|---|---|---|---|---|
| €10,000 | €10,000 | 1 | €500 | €9,500 |
| (1) | (2) | (3) | (4) | (5) |
(1) Balance = Deposit (€10,000) + Sum of Realized Profit & Loss (€0) = $10,000
(2) Equity = Balance (€10,000) + Sum of Unrealized Profit & Loss ($0) = $10,000
(3) # Lots open = Investment (€100,000) / Value of one lot (€100,000) = 1 lot
(4) Used Margin = # Lots open (1) x Value of one lot (€100,000) x Margin (0.5%)
= €500
(5) Usable Margin = Equity (€10,000) – Used Margin (€500) = €9,500
- The EUR has risen and the EUR/USD quotes 1.2900-1.2902.
The investor decides to take his profit and enters a sell market order in the AFX
trading platform. The order is executed instantaneously and the investor sells 1
lot of EURUSD at 1.2900.
By doing this, he commits in the simultaneous selling of EUR 100,000 (1 lot ) and
the buying of USD 129,000 (= €100,000 x 1.2900).
- Transaction Flows Report — Day 2
| Account Name | Credit/Debit | Day 1 | Day 2 | Comment |
|---|---|---|---|---|
| EUR Account | D | EUR+100,000 | EUR -100,000 | Sell # lots (1) x lot value (100,000) |
| USD Account | C | USD — 127,300 | USD +129,000 | Buy # lots (1) x lot value (100,000) x EURUSD Quote (1.2900) |
The euro side of the transaction involves a credit and a debit of EUR 100,000, the
investor's EUR account will show no change.
The USD account will show a debit of USD 127,300 and a credit of USD 129,000. This
results in a profit of USD 1,700 = approx. EUR 1,318 (= USD 1,700 / 1.2902) which
represents a 13.18% profit on the deposit of EUR 10,000.
- Client Account Report– Day 2 (AFTER TRADE EXECUTION)
| Balance (EUR) | Equity (EUR) | Lots Open # | Used Margin (EUR) | Usable Margin (USD) |
|---|---|---|---|---|
| €11,318 | €11,318 | 0 | €0 | €11,318 |
| (1) | (2) | (3) | (4) | (5) |
(1) Balance = Deposit (€10,000) + Sum of Realized Profit & Loss (€ 1,318)= €11,318
(2) Equity = Balance (€11,318) + Sum of Unrealized Profit & Loss (€0) = €11,318
(3) All positions are closed, therefore # Lots open = 0
(4) Used Margin = # Lots open (0) x Value of one lot (100,000) x Margin (0.5%) =
€0
(5) Usable Margin = Equity (€11,318) – Used Margin (€0) = €11,318
Note: For simplicity purposes we have disregarded the effect of difference in interest rates between the EUR and USD over the 2-day period which would have marginally altered the profit calculation.
