Overview

How did it start ?

Forex trading finds its origins centuries ago. Indeed, the diversity of currencies as well as the need to trade them goes back up to the Babylonians. They were the first starting to use paper notes and receipts. Back then, speculation hardly ever happened, and the undergoing speculative activity in the market today would have certainly been frowned upon.

Before the creation of currency, nations traded goods directly, “paying” for one good by bartering it for another. The increasing need to have a common support for trading led to the creation of money. In the beginning, trading partners would use a common form of money to conduct their business, which was usually gold or silver. Eventually the benefits of paper currency became evident, but since each country issued its own currency, it appeared to be too limited for international trading. Indeed, the purchasing power of each currency differed considerably and could differ over time depending on how much money supply the countries would issue.

Coins were initially minted from the preferred metal and in stable political regimes, the introduction of a paper form of governmental I.O.U. during the Middle Ages also gained acceptance. This type of I.O.U. was introduced more successfully through force than through persuasion and is now the basis of today’s modern currencies.

Before the First World War, most Central banks supported their currencies with convertibility to gold. But, the gold exchange standard had its weaknesses of boom-bust patterns. As an economy strengthened, it would import a great deal from out of the country until it ran down its gold reserves required to support its money; as a result, the money supply would diminish, interest rates escalate and economic activity slowed to the point of recession. Ultimately, prices of commodities hit bottom, appearing attractive to other nations, who would sprint into buying fury that injected the economy with gold until it increased its money supply, drive down interest rates and restore wealth into the economy. However, for this type of gold exchange, there was not necessarily a Central bank need for full coverage of the government’s currency reserves. This did not occur very often, however when a group mindset fostered this disastrous notion of converting back to gold in mass, panic resulted in so-called “Run on banks ” The combination of a greater supply of paper money without the gold to cover led to devastating inflation and resulting political instability.

The Great Depression and the removal of the gold standard in 1931 created a serious lull in the Forex market activity. From 1931 until 1973, the Forex market went through a series of changes. These changes greatly affected global economies at the time and speculation in the Forex market during these times wasn’t substantial.

In order to protect national interests, increased foreign exchange controls were introduced to prevent market forces from punishing monetary irresponsibility.

Near the end of World War II, the Bretton Woods agreement was reached on the initiative of the USA in July 1944. The conference held in Bretton Woods, New Hampshire, rejected John Maynard Keynes’ suggestion for a new world reserve currency in favor of a system built on the US Dollar. The new system required that each country valued its currency in terms of gold or the United States dollar, which, of course, fixed the exchange rate among all currencies. The countries were required to maintain the exchange rate to within 1% of the peg, but, if special circumstances required, they could allow the exchange rate to fluctuate by up to 10%. However, if this was not adequate, then the country would have to seek approval from the IMF board to change the exchange rate by more than 10%. This prevented countries from devaluing their currency for their own benefit.

To maintain the limits, a country could:

  • use official reserves, which is the foreign currency held by a country from a previous surplus.
  • borrow from the IMF by borrowing the foreign currency, and using its own currency as collateral.
  • sell gold to a country for its currency.

The Bretton Woods system came under increasing pressure as national economies moved in different directions during the 1960’s. A number of realignments held the system alive for a long time but eventually Bretton Woods collapsed in the early 1970’s following president Nixon’s suspension of the gold convertibility in August 1971. The dollar was not any longer suited as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits.

The Birth of the Foreign Currency Exchange

The foreign currency exchange market was born when floating exchange rates began to materialise because Bretton Woods agreement was abandoned in 1971.

This advancement was welcomed with open arms by the International companies who had often noticed big profit changes both positive and negative simply based on the value of their native currency against the value of the currencies in the markets in which they traded their day to business activities.

These companies would see fluctuating exchange rates affect their profit and loss accounts, often with millions being made or lost simply on the value of one currency against another.

It was also these companies that were first to spot the huge money making opportunity currency fluctuations offered and these same companies were the first to leap on to the Forex trading bandwagon and attempt to increase their profit margins through brave yet profitable currency exchange decisions.

The European Economic Community introduced a new system of fixed exchange rates in 1979: the European Monetary System. The quest for currency stability continued in Europe with the 1991 signature of the Maastricht Treaty. The goal was not only to ensure fixed exchange rates, but also to plan the replacement of many of the national currencies into Euro. London was, and remains the principal offshore market. In the 1980s, it became the key center in the Euro/Dollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance.

In Asia, the lack of sustainability of fixed foreign exchange rates has gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates in particular in South America also looking very vulnerable.

While commercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have discovered a new playground. The Forex exchange market initially worked under the central banks and the governmental institutions but later on it accommodated the various institutions, at present it also includes the dot com booms and the World Wide Web. The size of the Forex market now dwarfs any other investment market. The foreign exchange market is the largest financial market in the world. Approximately 4 trillion dollars are traded daily in the foreign exchange market.

 

Introduction to the Foreign Currency Exchange

 

For those of you that are new to the foreign exchange (Forex) market, it is important to familiarize yourselves with this market’s characteristics and unique attributes. The Forex market allows traders to buy and sell distinct currency pairs. We also supply our traders with the possibility to trade with Commodities and indexes. No commission is charged per trade, the broker is compensated through the buy and sell price differential – commonly known as the “spread”. Below are a few guidelines to start trading with Advanced Currency Markets – your gateway to the largest and most liquid market on earth.

 

What is Forex ?

Forex is the largest marketplace in the world with more than 4 trillion dollars changing hands daily; making it one of the most attractive and lucrative markets. The Forex market allows you to buy and sell currencies against each other and speculate on the differences in exchange rates. Making a transaction on the Forex market is like trading in any other market.

 

Forex terminology

The Forex market is an specific market, and like many other financial markets it has its own language and practices.

 

Open a position

In order for you to understand the following mechanisms, we would like to remind you that all the amounts quoted in this section are after leverage application amounts.

Buying/Selling – B/S

If you want to open a position (i.e.: place an order to sell – to make a profit if the exchange rate falls) you have to choose the volume (i.e.: 1/0.1 /0.01) from the drop down menu on the platform and then click either on the “SELL” or “BUY” Button.

 

Volume

Corresponding units of the traded currency

1

100,000

0.1

10,000

0.01

1,000

 

This will open a position in the market and you will receive an immediate notification of it in your MetaTrader 4 terminal.

To close an open position, you will  have to reopen your active trade and click on the “CLOSE” button. This will in fact apply to the opposite order that you made before.

Different order types also exist to open or close a position under a certain condition.

The spread

As with any market, for each currency pair, there are 2 prices. The difference between them is called the spread.

The spread is measured in points or pips, which is the lowest decimal figure in a currency rate.

For a EURUSD, a pip equals 0.0001 (or 10 dollars on 100,000), for EURJPY a pip equals 0.01 (or 1000 yen on 100,000).

Learn more about  P/L calculation on the SPREADS page .

 

Forex currencies quotation system

Currencies are quoted in pairs, for example – EUR/USD or USD/JPY. The first currency in the pair is called the base currency and the second is called the counter currency.

The base currency is the ‘basis’ for purchases and sales.
For example, if you buy EUR/USD, then you acquire Euros and sell Dollars. You shall do this if you expect the Euro to gain value against the Dollar.

It is also possible for a currency pair to be quoted as USD/EUR, but this quotation is extremely rare.

Each transaction must have 2 sides – a buy and a sell (or a sell and a buy).
By this, we mean that it is impossible to buy 100,000 EUR/USD and then exchange it for another currency pair (i.e.: EUR/JPY) without closing the first position.

Also please note that no physical currency delivery will be made. For these purposes banks and exchange companies, which specialize in low-rate currency conversions are available.

 

An “on the spot” market

Forex market working hours

The Forex market, based on ‘spot’ transactions, is unique in comparison with all other global markets because trading takes place 24 hours a day, 5 days a week. Financial centers are open for work, and banks and other organizations exchange currencies in different parts of the world for different purposes.

Therefore, trading never stops apart from a short break during the weekend. Early closings are possible depending on calendar arrangement such as, for example, Christmas or New Year’s Eve.

Rollover of positions (swap)

Except for “Islamic account” terms, an overnight trade will incur swap costs.

 

Market Orders

A market order is an order to buy or sell at the current market price. The execution of the order is instantaneous. If needed you can also place a market order over the phone, by reaching the Dealing room which usually takes a few more seconds.

Limit Orders

  • A limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. The trader specifies the price at which he wishes to buy/sell a certain currency pair and also specifies the duration that the order should remain active.
  • GTC (Good Till Cancelled): A GTC order remains active in the market until the trader decides to cancel it. The dealer will not cancel the order at any time therefore it is the customer’s responsibility to remember that he put the order.
  • GTD (Good Till Date): A GTD order remains active in the market until the end of the expiration date you set.

Stop orders

  • A stop order is also an order placed to buy or sell at a certain price. The order contains the same two variables, price and duration. 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, add to a pre-existing position and profit taking. The same variations are used to specify duration as in limit orders (GTC and GTD).

Learn more about the IbcFX Stop Loss policy

Example: Trader x Buys EUR/USD 100,000 at 0.9340, he is 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 0.9310 is a support level so he places a stop loss order to sell at that level. Trader x has limited his risk on this particular trade to 30 pips or US 300 $.

Another usage of a stop order is when a trader is expecting a price breakout to occur and wishes to grasp the opportunity to ‘ride’ the breakout. In this case, he will place an order to buy or sell ‘on stop’.

Example: Trader x sees EUR/USD breaking through the 0.9390 resistance level. He believes that if this happens, the price of EUR/USD could be headed to 0.9450 or over. At this point the market is at 0.9350 so trader x places an order to initiate a buying position of 500,000 at 0.9392 ‘on stop’.

 

Note: Stops are guaranteed in Forex within regular market conditions. At a time of fast market gaps or market opening, there may be changes regarding the close price. Stop orders also at opening or fast market will be executed, but the order may not be filled at the desired price. As a result, the initial risk can be estimated but not guaranteed. During times of extreme volatility it can be difficult or impossible to execute the requested price.

 

Profit and Loss calculation

Approximate USD values for a 1 pip move per contract in our traded currency pairs are as follows, per 100,000 units of the base currency:

Currency pairs

1 pip

1 pip move per 100k (lot)

EURUSD

0.0001

EUR 100,000 x .0001 = USD 10.00
USDJPY

0.01

USD 100,000 x .01 = JPY 1,000 /
spot = approx. USD 9.7
USDCHF

0.0001

USD 100,000 x .0001= CHF 10.00 /
spot = approx. USD 8.5
GBPUSD

0.0001

GBP 100’000 x .0001 = USD 10.00
EURJPY

0.01

EUR 100,000 x .01 = JPY 1,000 /
spot = approx. USD 9.7
EURCHF

0.0001

EUR 100,000 x .0001 = CHF 10.00 /
spot = approx. USD 8.5
EURGBP

0.0001

EUR 100,000 x .0001 = GBP 10.00 /
spot = approx. USD 19.00
GBPJPY

0.01

GBP 100,000 x .01 = JPY 1’000 /
spot = approx. USD 9.7
GBPCHF

0.0001

GBP 100,000 x .0001 = CHF 10.00 /
spot = approx. USD 8.5
CHFJPY

0.0001

CHF 100,000 x .01 = JPY 1’000 /
spot = approx. USD 9.7
USDCAD

0.0001

USD 100,000 x .0001= CAD 10.00 /
spot = approx. USD 8.00
AUDUSD

0.0001

AUD 100,000 x .0001 = USD 10.00
USDSGD

0.0001

USD 100,000 x .0001= /
spot = approx. USD 6.00
USDSEK

0.001

USD 100,000 x .001= /
spot = approx. USD 1.6
USDNOK

0.0001

USD 100’000 x .0001= /
spot = approx. USD 1.6
USDHKD

0.001

USD 100’000 x .001= /
spot = approx. USD 1.2
AUDJPY

0.01

USD 100’000 x .0001= /
spot = approx. USD 9.7

 

On a typical day, liquid currency pairs like EUR/USD and USD/JPY can fluctuate up to a full point (0.0100 –  100 pips). On a EUR 1,000,000 position a full point on EUR/USD equates to 10,000 USD.

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