Introduction to Forex Trading

Moving across to Forex trading is a natural progression for millions of traders around the world who are looking to start trading FX on MT4. Our introduction to Forex trading is a great way to lay a solid foundation, especially if you are new to the currency markets.

For those looking to dip their toe in the water, our introduction to Forex trading covers all the critical basics plus a few of the advanced topics. We start with What is Forex and move all the way down to swap and rollover rates.

Towards the bottom you will see one of the most popular and frequently asked questions, which relates to margin FX trading examples. Spend some time on this page and feel free to get in contact if you have any questions. Our team is here to help.

introduction to forex

Forex

What is Forex

The global foreign exchange ("FOREX", "Forex" or "FX") market is the largest market in the world with more than $5 trillion daily turnover ­ dwarfing the combined turnover of the world's stock and bond markets. For this same reason, private investors and individual traders have entered the market and discovered several advantages ­ many of which are not available in the other markets.

The liquidity and competitive pricing available in this market are unsurpassed, and today with the irregularity in performance in other markets, the growth of Forex trading, investing and management is accelerating.

Who Trades Forex?

Online trading, web­ based research and analysis combined with competitive pricing have made the market more accessible. Hundreds of thousands of informed individuals, businesses and investment funds now actively trade Forex.

Features of Trading Forex?

More recently, private investors and individual traders have entered the market for global currency as they discover the advantages of:

  • Leverage trading
  • Market liquidity with 24 hours a day trading
  • Commission free trading (standard account) or very low dealing costs (pro account)
  • Dynamic movement and opportunities for profit

Aggressive traders are attracted by the volatility of the Forex market and the opportunity for substantial profits, particularly when using leverage.

Please note, the effect of leverage is that both gains and losses are magnified. You should only trade if you can afford to carry these risks.

Our Forex Smart Guide is intended to give you a greater level of transparency into trading CFDs and Forex. This Information should be considered in conjunction with our Product Disclosure Statement and Financial Services Guide and is not designed as a replacement.

Spreads

Base Currency and Counter Currency

A trade requires two currencies (a cross) in which the first currency is known as the "base currency", and the second currency is known as the "quote currency". A forex trade involves the simultaneous buying of one currency and selling of another.

Buying a currency pair means one is speculating in the base currency appreciating in value against counter currency. Alternatively, when selling a currency pair, you are expecting the base currency to depreciate against the counter currency.

GO Markets will automatically exchange your profits and losses into your deposit currency.

Bid-Ask Spread

When trading Forex, investors are quoted a dealing spread, which offers a buying and selling level for the trade. When clients are wanting to sell a currency pair, they are interested in the Bid price. Alternatively, when clients are wanting to buy a currency pair, they are interested in the Ask price. The Bid price is always lower than the Ask price.

The difference between the Bid and Ask price is known as the Spread which is usually measured in pips.

The dealing spread for major currencies can range according to market liquidity, however you will find major currencies typically range between 0.5 – 2 pips.

For example, when AUD/USD is trading at 0.71358/0.71376, the spread is 1.8 pips.

Leverage

Leverage Explained

One of the key aspects of Forex trading is the ability to trade using "leverage". It determines the required margin and amount of funds traders need to have in their trading accounts in order to take a position. Put simply, leverage allows you to take a position of much higher value than the monies deposited in your trading account. So in other terms, a higher leverage means a lower margin requirement to place a trade.

Example of how leverage works:

You have a trading account with GO markets with a balance of $10,000. If you have a trading leverage of 100:1 and wish to use $1,000 on one single transaction as the margin, then you will have an exposure of $100,000 in your base currency ($1,000) = 100 x $1,000 = $100,000 (trade value). The concept here is that leverage has allowed you to make a transaction with a total exposure of $100,000.

Thus, the leverage facility allows you to potentially make large profits (or losses) from a relatively small initial investment.

Margin Trading Explained

Forex trading is normally undertaken on the basis of 'margin trading'.

A relatively small collateral deposit is required in order to initiate much larger traded positions in the market.

For example, you have a trading account with GO markets with a balance of $10,000. If you have a trading leverage of 100:1 and wish to use $1,000 on one single transaction as the margin, then you will have an exposure of $100,000 in your base currency ($1,000) = 100 x $1,000 = $100,000 (trade value). The concept here is that GO Markets have temporarily given you the necessary credit to make the transaction you are interested in making.

Margin trading demands a disciplined approach and a solid understanding of the risks involved.

Margin FX Trading Examples

Please note the following assumptions: · On the MetaTrader 4 platform, 1 lot (contract size) equals 100,000 of the base currency.

  • Pip values are calculated in the counter currency
  • Profit is calculated by (close price ­ open price) x contract size.
  • The profit is converted to the account currency (AUD).

Example 1:

A client buys 1 lot of AUDUSD at 0.75250.
The position is closed at 0.75480.
Profit/loss is calculated as (0.75480 ­ 0.75250) x 100,000 = USD230.
The profit/loss is converted to the account currency by the following calculation: 230/0.75480 = AUD304.71. (Assuming AUDUSD is at 0.75480 at the time)

Example 2:

A client sells 0.5 lots of EURGBP at 0.87900.
The position is closed at 0.88030.
Profit/loss is calculated as (0.88030 ­ 0.87900) x 50,000 = ­GBP65.
The profit/loss is converted to the account currency by the following calculation: 65 * 2.03780 = ­AUD132.46. (Assuming GBPAUD is at 2.03780 at the time)

Example 3:

A client sells 0.5 lots of AUDJPY at 85.927.
The position is closed at 85.682.
Profit/Loss is calculated as (85.927 – 85.682) x 50,000 = JPY12,250.
The profit/loss is converted to the account currency by the following calculation: 12,250/85.682 = AUD142.97.

Risk

Monitoring Your Risk Exposure

It must be pointed out that it is extremely imperative to understand the risks involved in trading Forex using high leverage and traders must find the appropriate level that suit their trading styles as the effect of leverage is that both gains and losses are magnified.

Many FX traders use Expert Advisors (EA’s) to trade on MetaTrader 4, and popular EA’s often includes money management tools designed to place the correct trade volume based on the size of the account. However, not all EA’s feature these tools so it is important that traders always manually supervise the trading activities on their accounts and make any margin payments as they become due.

Increased leverage carries a greater risk and the potential to make significant losses on very small movements in the Forex market.

Our GO Markets' MetaTrader 4 platform has been designed to effectively monitor and allow you to control risk exposure. Based on each client's margin requirement, the platform will calculate both the funds needed to retain your current open positions and the funds required to enter into new positions. However, as stated above, it is traders' own responsibility, not GO Markets, to continually monitor their positions. If the equity in your trading account falls below the margin requirement, a 'margin call' will ensue, and we may close all your open positions to limit your risk to usable margins.

Swaps

Swap and Rollover Rates Explained

When you buy or sell a currency pair and hold it overnight, a Swap or Rollover fee may be paid or charged to you. This is the funding (interest) component which is needed to maintain your position. The amount of which you receive or pay will depend on the relative interest rate yield of each currency in the traded pair, among other important considerations such as money market rates and liquidity provider charges.

Spot FX and Metals trades are settled two business days from the entry date. As trading through GO Markets does not involve physical delivery, all trades left open at the end of a trading day (23:59:59 Platform Time) will be rolled over to the next day and as such will have exposure to a swap charge or credit.

It is important to note that the rollover at the close of Wednesday's trading will be three times the usual amount. This charge is market convention, accounting for weekend settlement.

GO Markets swap rates are calculated using a consensus of our up­stream liquidity partners and may be adjusted both positively and negatively in the interest of competitiveness and/or local costs.

Swap rates for individual currency pairs and metal contracts can be viewed by referring to your MT4 Terminal, right click on Market Watch, left click on Symbols, then choose a currency pair, CFD or precious metal of your choice, followed by Properties. Rates shown are expressed in ‘points’ where 1.0 point is equal to one tenth of 1 Pip.

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Trading Forex and Derivatives carries a high level of risk, including the risk of losing substantially more than your initial expenditure. Also, you do not own or have any rights to the underlying assets. The effect of leverage is that both gains and losses are magnified. You should only trade Forex if you can afford to carry these risks.

GO Markets Pty Ltd does not guarantee the performance or return of capital. You should only trade in risk capital (that is, capital you can afford to lose). Please note that the historical financial performance of any underlying instrument/market is no guarantee or indicator of future performance.

Trading Derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved, and seek independent advice if necessary. A Financial Services Guide (FSG) and Product Disclosure Statement (PDS) for our products are available from GO Markets Pty Ltd to download at this website or here, and hard copies can be obtained by contacting the offices at the number above.

Please also note that your call may be recorded for training and monitoring purposes. Any advice provided to you on this website or by our representatives is general advice only, and does not take into account your objectives, financial situation or needs. You should therefore consider the appropriateness of our advice before making any decision about using our services. You should also consider our PDS documents before making any decision about using our products or services.

The information on this site is not directed at residents in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

The GO Markets AFSL authorises us to provide financial services to people in Australia. However, GO Markets complies with the obligations arising from our AFSL in respect of the financial services provided to all of our clients, including those who reside outside of Australia.

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