Forex 101

There are many reasons for the popularity of foreign exchange trading, but the most predominant is the leverage available, the high liquidity, 24 hour trading access 5 1/2 days a week, and the very low dealing costs associated with trading. Of course many commercial organizations participate purely due to the currency exposures created by their import and export activities; however, the main part of the turnover is accounted for by speculation.

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What is Forex?

Foreign Exchange, Forex, or simply FX, are all terms used to describe the trading of the world's major currencies. The Forex market is the largest market in the world, with trades amounting to more than $3 trillion USD every day. Most Forex trading is speculative, with only a low percentage of market activity representing governments' and companies' fundamental currency conversion needs.

Unlike trading on the stock market, the Forex market is not conducted by a central exchange, but on the interbank market, which is thought of as an OTC (Over The Counter) market. Trading takes place directly between the two counterparts necessary to make a trade, whether over the telephone or on electronic networks all over the world. The main centers for trading are Sydney, Tokyo, London, Frankfurt, and New York. This worldwide distribution of trading centers means that the Forex market is a 24-hour market.

Trading Forex

A currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a “Cross”. Examples include the EUR/USD, or the GBP/JPY. The most commonly traded currencies are called “Majors”. Examples include EUR/USD, USD/JPY, USD/CHF, and GBP/USD. The most important Forex market is the Spot market, as it has the largest volume. The market is called the Spot market because trades are settled immediately, or "on the spot". In practice, this means 2 banking days.

Key Forex Terms:

What is a Pip?

In the Forex market, prices are quoted in Pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%. In EUR/USD, a 3 pip spread is quoted as 1.2500/1.2503. Among the major currencies, the only exception to that rule is the Japanese Yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1% of a Yen, as opposed to 1/100th of 1% with other major currencies). In the USD/JPY, a 3 pip spread is quoted as 114.05/114.08.

What is the Spread?

The Spread is the point difference between the price at which you can sell currency (Bid), and the price at which you can buy currency (Ask).

What is the leverage and margin?

Margin is the amount of money needed to open or maintain a position. Basically it is used as a security deposit to the trader's account that is intended to cover possible trading losses in the future. Margin enables traders to hold a much larger position than their account value.

Leverage allows traders the ability to control a large dollar amount of a Commodity with a comparatively small amount of capital. The leverage at Gallant allows a trader to hold positions 100 to 400 times larger than the amount actually deposited. For example, if you deposit 1000 USD, you are able to trade 100,000 USD in currency.

What is a Rollover?

Rollover refers to the process of closing open positions for today's value date and opening the same position for the next day's value date at a price reflecting the difference in interest rates between the two currencies. Gallant pays or charges clients rollover interest at competitive rollover rates for all open Micro and Standard positions. At the end of the trading day, 22:00 GMT, an account with any open positions is either credited or debited interest on the full size of the positions. This is known as rollover interest. Rollover interest is calculated based on the full value of the client position rather than the value of the margin or collateral necessary to take on that position. A client holding one standard lot of USD/JPY, with 5,000 USD in the account will be assessed interest on the 100,000 of the position rather than the 5,000 account balance.

Rollover is required because all trades must be settled in two business days. In accordance with international banking practices, Gallant automatically rolls over all open positions for settlement to the next day at 22:00 GMT. Rollover involves exchanging the current position for a position expiring the following settlement date. For example, for traders who execute on Monday, the value date is Wednesday. An exception occurs when a position is opened and held overnight on Wednesday. The normal value date would be Saturday, but because banks are closed on Saturday, the value date is actually the following Monday. Due to the weekend, positions held overnight on Wednesday incur or earn an extra two days of interest. Trades with a value date that fall on a holiday also incur or earn additional interest.

Rollover interest can provide an added stream of profit or loss to a client. As an example, a trader that believes the Great Britain Pound's exchange rate will stay roughly equal to the Japanese Yen's for the next year, will buy the GBP/JPY pair since the Pound has a higher interest rate and will accrue rollover interest. An account would be credited around $20 a day* for a standard GBP/JPY lot. If this trader's prediction comes true and the exchange rate is the same a year later, with fluctuations in between**, they would earn a year's worth of interest on the position. Since there are around 365 interest bearing days in a year, that one standard lot of GPY/JPY could potentially earn $7,300 (365 x $20).***