Foreign Currency Trading Basics

What is foreign currency trading?

Forex (Foreign Exchange) is the name given to "direct access" foreign currency trading. With an average daily volume of $1.4 trillion, foreign currency trading is 46 times larger than all the futures markets combined and, for that reason, is the world's most liquid market. In the past, foreign currency trading was limited largely to enormous money center banks and other institutional traders. But in just the past few years, technological innovations and the development of online trading platforms, such as that used by T & K Futures, allow small traders to take advantage of the significant benefits foreign currency trading a.k.a. Foreign Exchange, Forex and FX trading. Please keep in mind that foreign currency trading carries significant risk of loss.  

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You can begin foreign currency trading right now.

If you are a trader now, or would like to become one, foreign currency trading through T & K Futures has significant advantages over other types of trading. Keep in mind that risk and profit potential are directly proportional to each other. Foreign currency trading has significant risk of loss.

For one thing, it is remarkably easy to get started. All you need to do is open up a demo account with $50,000 worth of "virtual money", and start playing around. You can begin trading immediately with zero risk, live quotes, and the same real time profits and losses you would have trading a real account.

It is just like learning to ride a bike. The best thing to do is just start. Eventually you take the training wheels off, and you ride for real. With foreign currency trading, that means putting money into a live trading account (you can open up one right now by clicking here), and begin trading for real.  

Foreign Currency Trading vs. other types of trading

Foreign currency trading is similar to the futures markets in that investors are able to control large amounts of an asset for a relatively small deposit, or margin -- but with substantial advantages. Without proper risk management, high degrees of leverage can lead to large losses as well as gains. For one thing, the leverage in foreign currency trading is greater than that of a typical futures contract. For a deposit of just $2,500 (2.5%), an investor can typically control $100,000 worth of a foreign currency. Secondly, because you access the market directly through electronic online trading, you pay zero commissions and exchange fees because the PFG and T & K Futures are compensated with the bid/ask spread on each trade. Thirdly, unlike futures, in foreign currency trading your risk is strictly limited. Trading with T & K Futures ensures that you will never lose more than you have in your account. You can never have a negative equity balance. And like futures, you can roll over forex positions indefinitely. Finally, foreign currency trading is a 24-hour-a-day market that literally follows the sun around the world, from the U.S. to Australia and New Zealand to Hong Kong, the Far East, Europe and then back again to the U.S. The huge number and diversity of investors involved make it difficult even for governments to control the direction of the market. The unmatched liquidity and around-the-clock global activity can make foreign currency trading the ideal market for an active trader like you. Foreign currency trading carries a significant risk of capital loss.

How foreign currency trading works

Foreign currency trading through PFG is remarkably easy. Everything you need to trade can be found right here on the PFG trading station. Open up a live trading account right now by clicking here.

Buying and Selling

In the forex market, currencies are always priced and traded in pairs. You simultaneously buy one currency and sell another, but you can determine which pair of currencies you wish to trade. For example, if you believe the value of the euro is going to increase vis-à-vis the U.S. Dollar, then you would go long one U.S. Dollar/Euro position. Obviously, the objective of foreign currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit. An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought back the equivalent amount to effectively close the position

Quoting Conventions

The first currency in the pair is referred to as the base currency, and the second currency is the counter or quote currency. The U.S Dollar, as the world's dominant currency, is usually considered the base currency for quotes, and includes USD/JPY, USD/CHF, and USD/CAD. This means that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The exceptions are the Euro, Great Britain pound, and Australian dollar. These currencies are quoted as dollars per foreign currency. As with all financial products, forex quotes include a "bid" and "ask." The bid is the price at which a market maker (such as PFG) is willing to buy (and you can sell) the base currency in exchange for the counter currency. The ask is the price at which a market maker will sell (and you can buy) the base currency in exchange for the counter currency. The difference between the bid and the ask price is referred to as the spread.

You get much lower margin requirements.

As you know, the margin deposit is not a down payment on a purchase. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows you to hold a position much larger than your actual account value. PFG' s online trading platform has margin management capabilities that allow you to get as much as four times the leverage of a typical futures contract. Without proper risk management, high degrees of leverage can lead to large losses as well as gains. The trading platform performs an automatic pre-trade check for margin availability, and will only execute the trade if you have sufficient margin funds in your account. The system also calculates the funds needed for current positions and displays this information to you in real time.

In the event that funds in your account fall below margin requirements, the PFG trading station will close all open positions. This prevents your account from ever falling below the available equity even in a highly volatile, fast moving market.

Rollovers are automatic.

In the spot forex market, trades must be settled in two business days. For example, if you sell 100,000 euros on Tuesday, you must deliver 100,000 euros on Thursday, unless the position is rolled over. As a service to you, PFG automatically rolls over all open positions -- that is, exchanges the trade forward to the next settlement date (two business days) at 5:00 PM New York time. The swap rates are determined at the Interbank level and are tradable instruments. In any spot rollover transaction there is a difference in interest rates between the two currencies that will be reflected in the overnight "loan." If the trader is long the currency with the higher interest rate in the pair, you should gain on the spot rollover through the premium relationship of that currency relative to the short currency. The amount of the gain is determined by the interest rate differential between the two currencies, and fluctuates day to day with the movement of prices. For instance, on any given day, the rollover can be $2 per lot for USD/JPY and $15 for GBP/JPY. Rollover fees are shown in dollars, and are posted in the "interest column" on the PFG trading station every day at 3:00 pm New York time. For day traders that never hold a position overnight, rollover will not affect trading.

Note: For positions that are open on Wednesday and held through 5:00 PM New York time, the amount added or subtracted to an account as a result of rolling over a position tends to be around three times the usual amount. This "3-Day" rollover accounts for settlement of trades through the weekend period.