Archive for the ‘Forex Terminology’ Category
Is the options/futures hedging such a good thing?
May 5th, 2010
OK…I spent more than 6 months reading on complex mathematical economical models, but because of that I totally lack the terminology behind the microecomics. One such thing is the futures/options hedging….
So, as far as I understand it – it sounds too good to be true, but do I miss something???
I understand it…like this example:
An investor buys 100,000 eur/usd units. The price is 1.4000.
However, the investor fears of lower price of 1.3900 and hence she puts call option on that price…or a future contract.
If the price reaches 1.3900 she(the investor) exercises the option and hence she is insured and doesn’t lose anything.
If the price goes up – she gains money.
Now, I read about delta hedging and this doesn’t sound that complex too, thuogh I need an hour or 2 to completely understand it.
I also see that you can get advantage from options/futures in many instruments. Such as:
Options,
CFD (illegal in USA)
Forex
But not commodities???
Pls. explain in 1-2 sentences your view…
Thanks alot in advance!
Forex Trading Software
Posted in Forex Terminology | 
Tags: cfd, commodities, delta hedging, economical models, eur usd, forex, futures options, investor fears, money, options futures, sentences | 
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I'm getting my butt kicked in the Forex market, can anyone PLEASE HELP ME?
May 3rd, 2010
I am new to the Forex scene, just started in January. I have invested ,270 so far and I am down to a measly 0!!!!!!!!!
I have studied Japanese candlesticks, I know all the terminology, I have just grasped the concept of perallel trend lines and I am learning about the Fibonacci ratios but I am still getting hammered. Is there something I am missing about this market?
Forex Trading Software
What is a "FIX" in forex terminology?
April 27th, 2010
I’ve read of a FIX being defined as,"One of the approximately 5 times during the FX day when a large amount of currency must be bought or sold to fill a commercial customers’ orders. Typically these times are associated with market volatility." Can anyone tell me anymore about FIX’s such as what times they occur exactly?
Forex Trading Software
Posted in Forex Terminology |
Tags: commercial customers, currency, market volatility, quot |
1 Comment »
Margin Account Explained
November 24th, 2009
The most important aspect for the average investor with respect to the forex market is the margin. It would be impossible for the average small investor to do currency trading without a margin. But what is a margin exactly?
The margin account enables the investor to control large amounts of currencies with only a relatively small cash deposit. With a margin account you borrow funds from (in many cases) the broker to control a larger amount of currencies. The reason for that is that currencies are usually bought and sold in lots with a value of USD 100,000. So, in this way you don’t have to have USD 100,000 or more to place trades.
But this doesn’t explain the margin in full detail. An important term with respect to margin accounts is leverage. The leverage determines how much you can control with a certain amount of currencies. Usually, the leverage is presented as a ration. For example, 1:100 means you will be allowed to control an amount which is 100 times more than the amount you have invested. In other words: a 1% margin account with an investment of USD 1,000 allows you to control an amount of USD 100,000.
However, you have to be careful: you could lose more than the initial investment, although this can be minimized by being prudent. The majority of brokers will terminate the trade prior to the point that the losses exceed the original deposit.
Advantages
As explained before the advantage of a margin account is that you can trade larger amounts than you would normally posses, which could have a positive effect on your profits. The leverage makes this possible and with large amounts the leverage can make significant results.
Trades in the forex market are expressed in more precise units than the actual cash, i.e. the US dollar is traded down to four decimal points. The smallest unit in which a currency is being traded is called a PIP. So, when trading with USD 100,000 lots each trade is worth USD 10 (4 decimals = 1/10000). Suppose the US dollar increases from USD 1.4344 to USD 1.4354 you will have a profit of 100 PIPs, which is USD 10, when you trade without a margin account. But when you would trade with a margin account you would have earned a profit of USD 1,000.
Risks
On the flip side, when you trade with a margin account you could potentially lose a lot of money quickly. With a 1% margin account and a devaluation of one single penny you will lose USD 1,000 instantly.
Fortunately, the forex exchange market recognizes the risks involved with margin accounts and therefore they have taken preventive safety measures in an attempt to minimize the risks involved. A good example is the stop loss order. What a stop loss order does, is to close out the position in a currency if the price crosses the point you have set. In this way you reduce the losses and at the same you will still have a good opportunity to make a profit.
Another risk that sometimes traders overlook is that if your position is close to the point where the losses are almost equal to the value of the margin account, the broker can close your position. While this automatically reduces the risks on a huge loss it also kills the option to make up for the loss in case you believe it is only a temporary downturn, because with a closed position you cannot make a profit when the price moves up again.
Buying and selling explained
November 19th, 2009
Forex trading is hot: everyone is talking about it and not without a reason! It offers a great opportunity to break free from the average day-to-day job without losing your current lifestyle. Actually, there is good chance that it will improve the lifestyle.
The majority of the experienced traders are of the opinion the opinion that the forex market is the best and most profitable market. The forex market used to be the sole domain of large financial institutions, countries central banks and major banks. A good example of a country central bank is the U.S. Federal Reserve Bank. But due to the Internet the market forex became accessible to the public. As a result, everyone who is willing to learn the forex trading techniques and who has the intention to make substantial profits can trade in the forex market.
The forex market differs from other trading markets. For example, you don’t have to pay broker fees, you don’t have to pay fees that futures and equity traders have to pay, and nor do you have to pay clearing fees or even NFA or SEC fees. You will appreciate that this makes the forex market very attractive.
The five major currencies in the forex market are the: US dollar, Euro, British pound, Japanese yen and Swiss franc. These five currencies account for over 70% of the North American trading because of their high activity and popularity in the world’s commerce transactions. Other well-known currencies are playing a much smaller role on the forex market. Therefore you could say that the mentioned five currencies constitute the backbone of the forex market.
So what exactly do they mean with buying and selling in the forex market? Buying is purchasing a particular currency pair, for example USD-JPY, to open a trade. Selling is just the opposite.
With buying you expect that the price of the currency pair will go up in due course. So you buy at a cheap rate and you will sell at a higher rate.With selling you anticipate that the price of the currency pair will go down over time. Then when that happens you will buy the currency pair back so that you make a profit.
At first this process seems to be complicated to comprehend, but with a little practice it is actually much more simple than you would think.
Forex for dummies
October 26th, 2009
Whilst the concept of the forex market is straightforward, i.e. selling and buying different currencies, the forex market is not an easy market to understand. Newbies have to familiarize themselves first of all with the terminology within the market.
In the next paragraphs we explain some terminology used in the forex market.
Forex market
Forex market is the abbreviation for foreign exchange market. Sometimes it is also referred to as fx market.
Currency exchange market
Another term used for the forex market is currency exchange market.
PIP
PIP stands for “point of percentage”. Every currency exchange rate consists of a number of decimals. The last decimal represents the pip value.
Fractional PIP
The fractional PIP is 1/10 of the normal PIP. The fractional PIP has been created to enabling brokers to offer sharper spreads.
Long position
Whenever a trader thinks that a currency rate will increase, e.g. USD versus EUR, the trader will have to buy USD first and then sell the USD at higher rate which will result in a profit. This is called a long position.
Short position
Whenever a trader thinks that a currency rate will decrease, e.g. USD versus EUR, the trader will have to sell USD first and then buy USD at a lower rate which will result in a profit. This is called a short position.
Pivot point
A pivot point is the level at which the marker direction changes for the day.
Forex trading chart
A forex trading chart is a chart in which all pivot points are plotted.
Volatility
Volatility is the relative rate at which the price of the currencies move up and down. The pace of the price changes in the forex market is very fast and therefore the forex market is called a high volatility market.
Bid price
The bid price is the selling price of a currency contract. The bid price is always lower than the ask price.
Ask price
The ask price is the purchase price of a currency contract.
Spread
The spread is the difference between the bid and ask price. The spread is the fee for the broker, since there are no commissions in the forex market.
Currency pair
Each currency is always traded against another currency, for example, USD versus JPY. This is called a currency pair.
Leverage
It is possible to trade with a multiple of the invested amount. In that case the trader is not required to put up the full value of the position. This is called leverage. Leverages of 50:1, 100:1 and even more are not exceptional in the fore market.
Margin
When the invested amount is leveraged the trader has to keep the invested amount in a so-called margin account. The margin account may not have a debit balance. In case this happens due to a loss, the debit balance of the margin account needs to be settled by the trader.
Rollover
A “rollover” or “Tom-next” (Tomorrow Next Day) stands for rolling a position to the following day.