What is Forex?

Before I began my internship at FXCM about three months ago, I had absolutely no prior knowledge of what foreign exchange market is all about. On my first day at FXCM, I was so puzzled by the new terminology and aspects of FX trading that I began feeling extremely overwhelmed. Forget trading and technical analysis, I literally did not know the logic behind forex trading. I took a deep breath, and gradually learned the following basics:

• Both forex and FX are acronyms for the Foreign Exchange Market. The FX market is the largest and most liquid financial market with an estimated daily volume of 1.5 to 2 trillion dollars A DAY. That number that isn’t only difficult to comprehend, it isn’t even comparable to the volume of equity trading.
  
  
• In the FX market, traders buy and sell currency pairs in attempt to make a profit from the exchange rate fluctuations. When you buy a currency pair, you hope the price will go up, giving you the option to sell at a profit. When you sell a currency pair, you hope the price to go down, enabling you to buy the currency pair back at a lower price. Trading forex can be highly profitable, but it also poses great risks. Just like with equities, at certain times, some currencies are riskier than others. Signing up with a broker is as easy as filling out an application, and depositing funds online. However, don’t underestimate the challenge. Even though it’s an easy market to enter, it’s not for everyone. Before depositing real cash you should consider whether or not this is really for you, and the way to do that is to practice on a demo account (like I am with FXCM. Click HERE to register your own free demo.)
  
  
• Currency Pairs
  As I just mentioned above, currency trading is carried out through the buying and selling of currency pairs. Currency pairs? What are those? Consider an example of a currency pair, the EUR/USD. The reason forex trading is done using currency pairs is because the way to value a certain currency is by comparing it to another currency. Or in other words, how many US Dollars do I need to buy one unit of the Euro? The first currency in the pair (EUR) is referred to as the Base Currency, while the second currency in the pair (USD) is the Counter Currency (aka the Quote Currency.) The price that you see for each currency pair is the current exchange rate for the given pair. That rate is different for the buy/sell, and the reason for this is explained in the next section. The exchange rate refers to the amount of the counter (USD) currency that can be exchanged for one unit of the base (EUR) currency. For example, if the EUR/USD is 1.3529, then one Euro costs $1 dollar 35 cents and 29 hundredths of a cent.
  
  
• The Spread
  Now you may wonder, just like I did, why the buy and sell prices for a given currency are different? Isn’t there supposed to be only ONE exchange rate? In forex trading the difference between the buy and sell prices is the way forex brokers make their money. The spread is defined as the difference between the buy and sell price, and is also known as the bid-ask spread.
  
  

FXCM Micro Trading Station (What Do I Need to Know?)

When I first logged into the FXCM Micro Trading Station, all I saw were a bunch of windows, numbers, and blue/red lights spark up. Even though confused at first, I slowly began clicking away on everything I could, experimenting with the program, and beginning to make my first steps as a forex trader. I slowly began learning all the nuances that seemed to trick me in the beginning, and began overcoming the barriers comprised of the differences between forex and equity trading. I’ve read the trading station’s user’s manual, watched the video tutorial, and read up on tips online, but was still left with unanswered questions. All three sources of information I found used the forex jargon, a language I was just recently introduced to and wasn’t too comfortable with as of yet. As I began to learn how to navigate the trading platform, I decided to come up with a quick run-down of what I’ve learned so far. I thought explaining it in simple and plain English would be vital for some of you, just as it would have been for me just a couple of days ago. I found these following tips important for a new trader’s first steps in forex trading.

Out of the six windows shown on the main page of the platform, I was most confused by the Dealing, Positions, and the Account windows. Here is my understanding of each aspect:

• Dealing Window
  
  This is where all the action occurs. Here you can see how prices of currency pairs fluctuate, the margin required, the pip cost and, and other critical information needed to open the desired position. Now let’s begin to decipher this secret jargon together.
  
  Notice, there are two tabs on the top of the dealing window, “Advanced Dealing Rates” and “Simple Dealing Rates”. We will begin with simple dealing rates, so click on that. In this window you can view the fluctuating prices of the currency pairs.
  
  1. When the Sell/Buy bullet sparks red, it means that the price of the given currency pair is decreasing. When it sparks blue, the price is increasing. You can open a buy/sell position, simply by clicking on the tab corresponding to the desired currency pair.
  
  2. The Spread is the difference between the sell and buy prices, also known as the bid-ask spread. The spread is the way forex brokers are able to make money without charging commission fees. That’s why most brokers advertise “tight spreads”!
  
  3. The High/Low are that currency’s daily highest value and lowest value. (Note: Since the forex market trades 24 hours a day, the trading day begins at 5pm Eastern time on one day and ends at 4:59:59pm on the following day.)
  
  4. Roll S/B is the overnight interest that is earned or paid on the currency per lot. Notice that the interest is either negative or positive. When it’s negative (that means money out), that amount per lot has to be paid. When it’s positive (that means money in), that amount per lot will be received if the currency pair is held overnight (through 5pm Eastern time). For example: Consider a 30 lot buy trade in EUR/USD. If you decide to hold this position overnight, you will have to pay $0.05 of interest per lot (Roll Buy because it’s a buy position), or a total of $1.50 for 30 lots. This is also true for Roll Sell. I already realize that there is more to rollover interest than I have just explained, and as soon as I learn more of the logic behind rollover interest and how it works, I will post an entry solely on that.
  
  5. Pip Cost is the potential loss/gain for every change in 1 pip point. A pip point is the fourth number after the decimal in a given price. For example, consider again the EUR/USD whose pip cost is .10. When opening a buy position at 1.37272, the current pip point would be 7. Whenever the value of a EUR/USD buy position would increase in one pip point (from 1.37272 to 1.37282), a gain of 10 cents would occur (per lot). If the buy EUR/USD value would increase by 10 pip points (from 1.37272 to 1.37372) and would result in a $1.00 gain per lot. When the pips decrease for a buy position, a loss occurs.
  
  
  6. MMR (Minimum Margin Requirement) is a good faith deposit needed to enter the position (deposit/lot). For a detailed explanation on Forex and margin trading, please visit the “Differences Between Equity and Forex Trading” blog entry.
  

• Now that you are familiar with the “Simple Dealing Rates” tab, it is easy to learn the “Advanced Dealing Rates” tab, since it contains the same information, just presented in a fancier way. The box to the right is one of the many grey boxes you should be seeing in the “Advanced Dealing Rates” tab. The L: 1.37130 is the daily lowest price of the EUR/USD, and opposite of it, the H: 1.37329 is the daily highest price. In between the daily high/low, the blue number 1.5 is the current bid-ask spread (if its blue that means it’s just gone up, if it’s red, the contrary). Here you can see both the Roll S and Roll B and in between them the pip cost. Just like in the “Simple Dealing Rates’ window, you can open a position by simply clicking on the Sell/Buy tabs. I will discuss in further detail how to do so.

• Positions Window
  
  A “position” is another term for a “trade”. When you open a buy position, you buy the base currency, and sell the counter currency (or vice versa for sell position). When you close the position, you end the trade you entered. Locate the positions window below the Dealing Window:
  
  Notice that there are three tabs: “Open Positions”, “Closed Positions, and “Summary”. When I first saw this window, I wasn’t as confused as with the Dealing Window. While trading equities, I used stops/limits, and I learned that the concept is pretty much the same in the forex market. Here is an overview of the different options found in the Open Positions window:
  
  1. Amount (K) is the number of lots you are currently holding in the given position. Micro lots are in thousands, so if you are buying 5 lots, you are essentially buying 5,000 units of the base currency.
  
  2. S/B denotes if it’s a sell or a buy position.
  
  3. Open the price you opened the position at.
  
  4. Close the price you would get if you would close the position right now (the current price).
  
  5. Placing a Stop is done to cut your losses after a given point. To place a Stop, you specify which price you want to close the position at (at a loss). If the price of the given currency pair hit’s that level, your position will automatically be closed. In other words, you don’t have to be sitting by the computer to watch out for losses, you can ask the trading platform to do that for you.
  
  6. Placing a Limit is very similar to placing a stop, however, a limit closes the position at a profit. In other words, if you know the profit level at which you are willing to close the position, you don’t have to physically sit by the computer. You simply enter the price you are willing to close at, or the limit price, and then you can leave your computer.
  NOTE: both stops/limits are ways to exit the market, the difference is that stops are used to cut losses, and limits are used to lock in profits.
  
  7. P/L stands for profit/loss and is denoted in pips. If the number is positive, the position is currently making money. If negative, then the position is currently losing money.
  
  8. Gross P/L stands for the profit/loss denoted in dollars. The amount is calculated by multiplying the pips given in the P/L section by the pip cost showed in the Dealing Window.
  
  9. The Roll is the overnight interest rate earned or paid on a given position. The rates are found in the Dealing Window, and a detailed explanation could be found above in the “Roll S/B” section.
  
  Both the “Closed Positions” and the “Summary” windows have similar columns to the “Open Positions” window.
  
  
  
• Accounts
  
  Locate the “Accounts” window to the right of the Dealing Window. At first, I was confused by why there were three different amounts (Balance, Equity, and Usable Margin). But since now I better understand the way trading on margin works, I am able to see the bigger picture. Here is a quick overview of my understanding of the way these columns work together"
  
  
  
  1. The Balance is the amount of money you had before you opened the positions you are currently holding. In other words, considering the above figure, before I have opened any of my current positions, my balance was $6,057.20.
  
  2. Consider Equity as the updated amount of money, the amount of money considering current gains and losses. As seen in the above figure, I am currently operating at a loss of 72 cents.
  
  3. Day P/L is the amount of profit/loss on a given day (in dollars.) (Note: As the trading day runs from 5pm to 4:59:59pm the following day, the Day P/L measures the change in Equity, since 5pm. Day P/L will reset everyday at 5pm.) That means that in the example above, my equity is $7.78 higher than it was at 5pm. (A loss would be represented as a negative number.)
  
  4. The Used Margin (Usd Mr) is calculated by adding together all the margin (MMR) set aside for my current positions. For a detailed explanation on MMR, please visit the “Differences Between Equity and Forex Trading” blog entry.
  
  5. The Usable Margin (Usbl Mr) is the amount of money I have available to use for MMR in order to open new positions. It is calculated as equity minus used margin. For example, for my current positions I have deposited 48.75 as MMRs, and at this point, I have 6,007.73 (6,056.48 – 48.75) available to open additional positions.
  
  6. The Usable Margin Percentage (Usbl Mr, %) is simply a different way to look at the amount of money you have available to open new positions. Currently, 99.20% of my equity is available for opening new positions. That means 99.20% of my Equity is still available as Usable Margin.
  
  7. Gross P/L is the difference between the equity and the balance, or in other words, your current gain/loss. As I calculated earlier, I am currently operating at a 72 cents loss.
  
  8. Margin Call (MC) is an extreme situation (which I am thankfully yet to experience) in which your Usable Margin goes down to zero, and all your trades are automatically closed out to prevent further losses.. The Y (Yes) and N (No) specify if a margin call has occurred. Since I can trade on a demo, I will try to simulate a Margin Call without risking real money and discuss the process in more detail in a future blog.
  
  9. I found hedging a bit confusing, and I when I will learn more about it, I will post an entry solely on hedging.
  
  
• Opening a position
  
  Even though I was initially confused when navigating the trading platform, there was one thing I was sure how to do: open a position. The reason is I was able to learn it so quickly is because of the ease of access from different parts of the platform. Here’s the easiest way (in my opinion) to open a trade:
  First, simply click on the grey box (see right) of the currency pair and the type of trade (buy/sell). After you click, a box will pop up (the box to the bottom left). This box is pretty much self explanatory; I only had to learn one concept to fully understand it: the difference between an “At Best” order and a “Market Range” order. An At Best order means that the order will be executed with a 100% certainty (you aren’t locking in a price, but are ensuring the execution of the order). For example, notice the rate for a buy EUR/USD is 1.36195. Now suppose that the moment you are about to click OK, the price goes up 10 pip points, to 1.36205. Even though the new price isn’t what was shown in the window at the moment, the order will be executed regardless at the best available price. A Market Range order works on ensuring a price, but does not promise execution. This option allows you to choose a range, in which the order would be executed. For example, if you decide you want a 3 pip range, the order will only be executed if the Buy rate for EUR/USD will be between 1.36165 to 1.36225.

• Closing a position
  
  Closing a position is even easier than opening one. In the “Open Positions” window, simply right click on the position you would like to close, and left click on the Close price. In the grey box that pops up, you may choose how many of the lots you are currently holding you would like to close and the order type (remember, At Best/Market Range). Now you may view the details of the trade by locating it in the “Closed Positions” tab.
  
  Thank you for reading my basic tutorial for the FXCM Micro Trading Station on how to read the dealing, position, and account windows. Right now I am learning how to open up charts and read them using the trading platform. In the next tutorial entry, I will talk about my experiences learning these and many helpful tips! Please let me know if you have any questions or suggestions, I will gladly answer!