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Forex Trading

 

Forex Trading
 

What IS Forex Trading?

Foreign exchange, also known as currency, or forex trading, is the world’s largest decentralized global market where all the world’s currencies are traded. The forex exchange market is the largest, and the need to exchange currencies of different jurisdictions is the sole reason why the forex market is the largest.

Foreign Exchange prices are influenced by a range of different factors, including inflation, interest rates, government policy, employment figures and demand for imports and exports.
Because of the sheer volume of forex market traders and the amount of cash exchanged, price movements can happen very quickly, making currency trading not only the largest financial market in the world, yet also one of the most volatile.

FOREX PAIRS

Forex trading instruments are comprised of what is called a Forex pair. To understand Forex trading Unlike other financial assets such as stocks, commodities or bonds, Forex trading always involves the combination of two currencies.

Lets look at a Forex Pair to better understand:

The most commonly traded Forex pair is the EUR/USD (EUR is the Euro, & USD is the US Dollar)

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The EURUSD tracks the worth of €1 in Dollars. Therefore, if the EURUSD exchange rate is quoted at 1.30, that means that each €1 is worth $1.30. If the exchanged rate rises to 1.40, that will indicate that the Euro has strengthened against the Dollar, as €1 is now worth $1.40. The opposite is true if the EURUSD rate falls to 1.20.

Traders of the EURUSD are actually trading the changes in the exchange rate between the Euro and Dollar. Therefore, if you bought the EURUSD and the Euro appreciated against the Dollar (the value of €1 rises in relation to the $) you will profit on the trade. If the Euro weakens against the Dollar, your position will be with a loss.

What Causes Exchange Rates to Change

Since Forex trading involves benefiting off of changes in the currency exchange rates, it is important to know why an exchange rate changes. The answer to this question is supply and demand. When there is more demand for one currency than another, it will cause the exchange rate values to change.

For example, when the tragic earthquake and tsunami hit Japan, the value of the Japanese Yen rose against other major currencies. This was due to the fact that Japanese companies that had investments out of Japan had to quickly bring their money back into Japan to pay for repairs and insurance liabilities. These companies converted their foreign holding into Yen in the process. As a result, there was a sudden spike in demand for Japanese Yen. The demand caused Yen exchange rates to change rapidly as a result.

The main causes of changes in supply and demand are due to changes in economic trends, geo-political events, and changes to market sentiment.

  • Economic Trends: When a country begins to show stronger than expected growth, it will often trigger increased investments in that country and raise currency demand. Such trends can last months or even multiple years and lead to one currency strengthening against another for a significant period of time
  • Geo-Political Events : Geo Political events can also effect currency exchange rates as investors may decide to quickly exit holdings in one country if they that their funds may become less safe.
  • Market Sentiment: If traders on an overall basis begin to take on additional risk, this will often create increased demand for so called "riskier currencies" which will cause exchanges rates to change.

Forex Instruments & Spreads

At CM Trading, we offer trading on the world's most liquid Forex pairs.

Instrument Regular Spreads*
(Will go lower)
Margin % Leverage Trading hours
EURUSD 1.5 pips 0.5 200:1 24h
GBPUSD 2.2 pips 0.5 200:1 24h
USDJPY 1.8 pips 0.5 200:1 24h
USDCHF 2.2 pips 0.5 200:1 24h
USDCAD 2.5 pips 0.5 200:1 24h
NZDUSD 2.8 pips 0.5 200:1 24h
EURJPY 2.5 pips 0.5 200:1 24h
GBPJPY 4 pips 0.5 200:1 24h
EURGBP 2.2 pips 0.5 200:1 24h
EURAUD 4.7 pips 0.5 200:1 24h
EURCHF 2.7 pips 0.5 200:1 24h
GBPCHF 4.5 pips 0.5 200:1 24h
EURCAD 5 pips 0.5 200:1 24h
CHFJPY 4 pips 0.5 200:1 24h
EURNZD 14 pips 0.5 200:1 24h
AUDJPY 3.8 pips 0.5 200:1 24h
CADJPY 3.7 pips 0.5 200:1 24h
AUDCHF 5 pips 0.5 200:1 24h
NZDJPY 5 pips 0.5 200:1 24h
AUDNZD 7 pips 0.5 200:1 24h
AUDCAD 5 pips 0.5 200:1 24h
AUDUSD 2.2 pips 0.5 200:1 24h
CADCHF 4.8 pips 0.5 200:1 24h
GBPAUD 7 pips 0.5 200:1 24h
GBPCAD 8 pips 0.5 200:1 24h
NZDCAD 5 pips 0.5 200:1 24h
NZDCHF 5 pips 0.5 200:1 24h
USDZAR 45 pips 0.5 200:1 24h

Russian RTS and USDRUB are not tradeable on our platform.
Instruments are visible but non-tradable but there is no execution on them.

Basic Forex terms

Listed below are some of the most common key terms used in Forex trading:

  • Pip - A Pip is a Percentage in Point (PIP), sometimes also referred to as " a Point." It is equal to the minimum price increase of a Forex trading rate. The most common Pip is 0.0001 or 1/10000.

  • Ask Price - The asking price is the price you can buy a currency at. It is also the price which the forex market is willing to sell the currency to you.

  • Bid price - The bid price is the price you can sell a currency at. The forex market is willing to pay you this price for this particular currency.

  • Spreads - Spreads are the difference between bid price and ask price in forex exchange.

  • Currency rate - This is the Rate at which one currency exchanges with another.

Margin Explained


Margin is calculated based on the real time value of the trading instrument divided by its margin ration. For example, a 1.0 Lot EURUSD position when the EURUSD is trading at 1.3000. Margin is calculated as follows:

100,000 (lot value) * 1.3000 (price of €1 in $'s) /200 (the EURUSD margin ration) = $650 in minimum margin

Forex is usually quoted in pairs, regarding one currency against another. Take for example sterling vs. US dollar - the rise and fall in the exchange rate between these two currencies are where a trader looks to make profits from. The first currency is also known as the base and is the one that you think will go down or up against the other currency which you are speculating against, which is known as the quote.

Learn more about Forex trading with CM Trading training videos here