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LEARN TO TRADE FOREX. TAKE ADVANTAGE OF LOW STARTING CAPITAL REQUIREMENTS.
- What is Forex Trading01
- Key Features of Forex Trading02
- Trade Both Long and Short03
- Calculating Profits and/or Losses04
- Forex Trading Examples05
- Key Benefits of Shares06
- Margin Obligations07
- Risks of Forex Trading08
- Styles of Forex Trading09
- Tools & Resources10
- How to Open an Account11
- Supported Brokers12
Introduction to Forex Trading
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1. What is Forex Trading?
Forex Trading, also known as Margin Foreign Exchange, FX or Margin FX is an agreement between you and your Forex Broker to pay the other the difference arising from movements in the value of an Underlying Instrument, without either party actually owning the Underlying Instrument.
Forex is an Over The Counter (OTC) derivative product. This means that Margin FX Contracts are created and traded off-market between parties (for example, between you and your FX Broker) rather than being traded on an exchange, such as a stock exchange or futures exchange.
The Underlying Instrument for a Margin FX Transaction is the Exchange Rate. The Exchange Rate can be either the price of one currency expressed in the terms of another currency (FX Transactions) or the price of a precious metal expressed in a specified currency or precious metal (Metal Transactions).
All Margin FX Transactions remain open until they are Closed Out. This occurs where you enter into an equal and opposite Transaction and the two positions are offset against each other.
2. Key Points of Forex Trading
Margin FX Transactions can either be FX Transactions or Metal Transactions.
FX TRANSACTIONS KEY POINTS:
RANGE OF CURRENCIES
TRADED IN PAIRS
TRADED AT RATE OF EXCHANGE
MADE UP OF TWO CURRENCIES
Unlike contracts traded on an exchange, OTC products are not standardised. The terms of an FX Transaction are individually tailored to the particular requirements of the parties involved in the contract i.e. your broker and you.
The terms involved in the negotiation of FX Transactions are:
- the Currency Pair;
- the amount of the Base Currency to which the Transaction relates (called the Notional Value);
- the Exchange Rate at which such currencies are to be exchanged; and
- the Value Date for the Transaction.
AGREEMENT BETWEEN YOU AN YOUR BROKER
FX TRANSACTIONS KEY POINTS:
Metal Transactions are the same as FX Transactions except in the following instances:
PROFIT OR LOSS FROM APPRECIATION OR DEPRECIATION
METAL TRANSACTIONS WILL ALWAYS BE GOLD OR SILVER
3. Take Both Long and Short Positions
Forex while traded in pairs you can take either direction when entering a transaction or trade.
4. Calculating Profits and/or Losses:
The gross profits or losses on a Margin FX Transaction will be equal to the difference between the value of the Base Currency multiplied by Exchange Rate at which the Transaction was entered into (this gives you the Terms Currency) and the value of the Base Currency multiplied by Exchange Rate at which the Transaction is Closed Out (this gives you the Terms Currency).
The difference between the two amounts will either be the gross profit (if your Long Currency appreciates relative to your Short Currency) or loss (if your Long Currency depreciates relative to your Short Currency) on the trade.
If the Underlying Exchange Rate moves in your favour (i.e. your Long Currency appreciates relative to your Short Currency) the amount determined by this formula will be greater than zero and your Forex Broker will credit this amount (less any fees, charges, commission and spreads) to your Trading Account. By contrast, if the Underlying Exchange Rate moves against you (i.e. your Short Currency appreciated relative to your Long Currency) the amount determined by this formula will be less than zero and Forex Broker will debit that amount (as well as any fees, charges, commission and spreads) from your Trading Account.
This example is included for illustrative purposes only, and is not indicative of actual exchange rates or values.
Assume your Trading Account Currency is NZD. You enter into a Margin FX Transaction by purchasing 100,000 NZD/USD (i.e. you enter into a “long” FX Transaction, where NZD is your Long Currency and USD is your Short Currency) and the Exchange Rate at which you enter into the FX Transaction is 0.7200. Later that day you Close Out the Margin FX Transaction by “selling” (or entering into a “short” FX Transaction, i.e. where NZD is your Short Currency) at a higher exchange rate of 0.7250.
The resulting gross profit on the Transaction would be US$500 being sale price (0.7250) less buy price (0.7200) x 100,000.
The net profit is determined after deducting commission (where applicable), Rollover charges, transaction costs and any other charges and is converted back to your Trading Account Currency
PROFITS & LOSSES
Profits and losses are realised if both the buy and the sell side of the Transaction have been completed and have been matched against each other or Closed Out. Profits and losses are unrealised if only one side of the Transaction has been completed (i.e. it remains an open position) and will only be realised when the other side of the Transaction has reached completion.
The Value Date for a FX Transaction is the date on which the parties (i.e. you and your broker) agree to settle their respective obligations. The Value Date can affect the Exchange Rate at which a FX Transaction is entered into. When you enter into a Margin FX Transaction with your broker, by default the Transaction will be a Spot Contract.
The Value Date for Spot Contracts is standardised and non-negotiable. For most spot foreign exchange contracts, the Value Date will be two business days from the trade date (T+2).
5. Forex Trading Examples
We have described how Forex Transactions work and the basic points of Forex.
6. Key Benefits of FX Products
Margin FX provides a number of benefits which must be weighed against the risks of using them. The benefits of Margin FX are as follows:
PROFIT POTENTIAL IN BOTH RISING AND FALLING MARKETS:
TRADE FROM ANYWHERE
7. Margin Obligations
Forex products are subject to margin obligations i.e. you must have sufficient Net Free Equity in your Trading Account for security and margining purposes. You are responsible for meeting all margin obligations with your broker.
TYPES OF MARGIN
Depending on the particular Margin FX Transaction, the market volatility for the Underlying Instrument and the Trading Platform you use, the Initial Margin for a Margin FX Transaction (where applicable) will typically be between 0.2% and 1% of the Notional value of the Margin FX Transaction, However, it is not uncommon for Initial Margins to be above this range.
Margin Requirements differ depending on the Trading Platform you choose and the broker you choose. In choosing a Trading Platform and broker, you should carefully consider the Margin Requirements of each Trading Platform as Margin Calls could have an adverse impact on your investment.
Your broker may, in their sole discretion and without the need to notify you, change the percentage Margin Requirements for a Trading Platform from time to time.
As the value of your Margin FX position will constantly change due to changing levels of the Underlying Instrument, the Margin Requirement (being the minimum Net Free Equity you must maintain in order for your broker not to Close Out some or all of your Margin FX Transactions) required to keep your positions open will also constantly change. This is commonly referred to as Variation Margin. The amount of your Margin Requirements (being the Initial Margin and any adverse Variation Margin) at any one time will be displayed on the open positions report made available through your Trading Platform.
Any adverse price movements in the market must be covered by further payments from you (unless you already have sufficient “Net Free Equity” in your Trading Account). Your broker will also credit the Variation Margin to your Trading Account when a position moves in your favour.
Your broker will determine the Variation Margin for a Margin FX Transaction by reference to changes in the value of the Underlying Instrument. In other words, each contract is effectively “marked to market” on at least a daily basis. “Marked to market” means that an open position is revalued generally in real time or at least on a daily basis to the current market value. The difference between the real time/current day’s valuation compared to the previous real time/day’s valuation respectively is the amount which is debited (in the case of unrealised losses) or credited (in the case of unrealised profits) to your Trading Account. The valuations are calculated using the closing value (at the close of trading on each day) of the Underlying Instrument as determined by the relevant Pricing Source. Intraday “marked to market” revaluations will be based on the last available value of the Underlying Instrument as determined by your broker in their sole discretion.
Margin Calls are made on a net Trading Account basis i.e. should you have several open positions with respect to a particular Trading Platform, then Margin Calls are netted across the group of open positions. In other words, the realised and unrealised profits of one Transaction can be used or applied as Initial Margin or Variation Margin for another Transaction.
When trading with any broker, it is your responsibility to monitor your Variation Margin obligations. Any notification of a Margin Call could be via a ‘pop up’ screen or screen alert which you will only receive notice if you access your online Trading Account via your Trading Platform. There may be instances where your broker does not provide you with a Margin Call notifying you of an obligation to meet a Variation Margin. This does not waive your obligation to meet that Variation Margin. If you fail to meet a Variation Margin your broker may in their absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open Transactions.
FAILING TO MEET A MARGIN CALL
If you do not meet Margin Calls immediately, some or all of your positions may be Closed Out by your Forex Broker without further reference to you.
Most Forex Brokers generally applies risk limits (referred to as Default Liquidation Thresholds) to ensure that the percentage of your Trading Account balance which you are using at any one time to satisfy Margin Requirements (Margin Utilisation) does not exceed certain pre-defined levels. If your Margin Utilisation exceeds the Default Liquidation Threshold for your Trading Platform, a Margin Call will generally be applied to your Trading Account. If you do not meet a Margin Call immediately, your FX Broker may Close Out some or all of your open Transactions without notice to you.
The Default Liquidation Threshold is determined by the Forex Broker for your Trading Platform. It is implemented for risk management purposes and may be varied by the Forex Broker at any time.
With Forex if you fail to meet a Margin Call, then your forex broker may in their absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open Margin FX Transactions and deduct the resulting realised loss from your Trading Account. You may be required to provide additional funds to your forex broker if the balance of your Trading Account is insufficient to cover those losses. If a Close-Out occurs you will not be able to enter into another Transaction until you transfer additional funds to your broker.
8. Risks of Trading in Forex
CHANGES IN THE PRICE, VALUE OR LEVEL OF THE UNDERLYING INSTRUMENT
Trading in the Margin FX involves a high degree of risk.
If there is an adverse change in the value of the Underlying Instrument, you will be required to transfer additional funds immediately to your Forex Broker in order to maintain your position i.e. to ‘top up’ your Trading Account balance. Those additional funds may be substantial. If you fail to provide those additional funds immediately, the Forex Broker may Close Out some or all of your open positions. You will also be liable for any shortfall in your Trading Account balance following that closure. This shortfall may, in some instances, be substantial.
You should be aware that the risks you face differ depending on which Trading Platform you choose to trade through. In particular, you will take credit exposure on the Forex Broker and Liquidity Provider with which the forex broker enters into Hedge Transactions (if any) in respect of your Transaction. Therefore, you should make your own assessment of both the broker’s ability to perform their obligations under the Margin FX Transaction and the relevant liquidity providers ability to meet its obligations under the corresponding Hedge Transaction (if any).