Basic Concepts
Learning to trade in a new market is like learning to speak a new language. It’s easier when you have a good vocabulary and understand some basic ideas and concepts. So let’s start with the basics of forex trading before moving on to learn how to use the Trading Station. For a more in depth introduction to the forex market.
WHAT IS FOREX?
Forex is a commonly used abbreviation for “foreign exchange”. It typically describes the buying and selling of currency in the foreign exchange market, especially by investors and speculators. The familiar expression, “buy low and sell high,” certainly applies to currency trading. A forex trader purchases currencies that are undervalued and sells currencies that are overvalued; just as a stock trader purchases stock that is undervalued and sells stock that is overvalued.
FOREIGN EXCHANGE:
Foreign exchange (FX) is the process of trading the currency of one country for the currency of a another. This process is necessary for international trade to take place in a world of different currencies. The value of one currency versus another is determined by the international exchange rate and, in most cases, is subject to fluctuations based on open trading of currency in foreign exchange markets.
HOW DO YOU READ A QUOTE?
Because you are always comparing one currency to another, forex is quoted in pairs. This may seem confusing at first, but it is actually pretty straightforward. For example, the EUR/USD at 1.4022 shows how much one euro (EUR) is worth in us dollars (USD).
WHAT IS A LOT?
A lot is the smallest trade size available. FXCM accounts have a standard lot size of 1,000 units of currency. Account holders can however place trades of different sizes, so long as they are in increments of 1,000 units like, 2,000, 3,000, 15,000, 112,000 etc.
WHAT IS A PIP?
A pip is the unit you count profit or loss in. Most currency pairs, except Japanese yen pairs, are quoted to four decimal places. This fourth spot after the decimal point (at one 100th of a cent) is typically what one watches to count “pips”. Every point that place in the quote moves is 1 pip of movement. For example, if the EUR/USD rises from 1.4022 to 1.4027, the EUR/USD has risen 5 pips.
WHAT IS LEVERAGE/MARGIN?
As mentioned before, all trades are executed using borrowed money. This allows you to take advantage of leverage. Leverage of 100:1 allows you to trade with $1,000 in the market by setting aside only $10 as a security deposit. This means that you can take advantage of even the smallest movements in currencies by controlling more money in the market than you have in your account. On the other hand, leverage can significantly increase your losses. Trading foreign exchange with any level of leverage may not be suitable for all investors.
The specific amount that you are required to put aside to hold a position is referred to as your margin requirement. Margin can be thought of as a good faith deposit required to maintain open positions. This is not a fee or a transaction cost, it is simply a portion of your account equity set aside and allocated as a margin deposit.
Why Trade Forex?
Online forex trading has become very popular in the past decade because it offers traders several advantages:
FOREX NEVER SLEEPS
Trading goes on all around the world during different countries’ business hours. You can, therefore, trade major currencies at any time, 24 hours per day, 5 days per week. Since there are no set exchange hours, it means that there is also something happening at almost any time of the day or night.1
GO LONG OR SHORT
Unlike many other financial markets, where it can be difficult to sell short, there are no limitations on shorting currencies. If you think a currency will go up, buy it. If you think it will fall, sell it. This means there is no such thing as a “bear market” in forex – you can make (or lose) money any time.
LOW TRADING COSTS
Most forex accounts are made up of low, competitive commissions and super-tight spreads. You trade the direct quotes from our liquidity providers with no hidden markups.2
UNMATCHED LIQUIDITY
Because forex is a US$5.3-trillion-a-day market, with most trading concentrated in only a few currencies, there are always a lot of people trading. This makes it typically very easy to get into and out of trades at any time, even in large sizes.
AVAILABLE LEVERAGE
Because of the deep liquidity available in the forex market, you can trade forex with considerable leverage (typically 200:1). This can allow you to take advantage of even the smallest moves in the market. Leverage is a double-edged sword, of course, as it can significantly increase your losses as well as your gains.
INTERNATIONAL EXPOSURE
As the world becomes more and more global, investors hunt for opportunities anywhere they can. If you want to take a broad opinion and invest in another country (or sell it short!), forex is an easy way to gain exposure while avoiding vagaries such as foreign securities laws and financial statements in other languages.
Important: be aware of the risks:
Finally, it cannot be stressed enough that trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. Remember, you could sustain a loss of some or all of your initial investment, which means that you should not invest money that you cannot afford to lose. If you have any doubts, we recommend that you seek advice from an independent financial advisor.
Forex Market Hours:
Given the global nature of currency trading, the market is open for business around the clock, 24 hours a day. It is important for the trader to know the times when the major markets are active and how this can be implemented in their trading.
As a general rule, a specific currency will usually be most active when that particular market is open. For example, the GBP and its related pairs, while active and tradable 24 hours per day, tends be most active and widely traded during the hours when the London market is open. Meanwhile the JPY and its related pairs will be more widely traded during the Tokyo business day.
The market hours for the major FX markets are as follows:
London – 3 AM through 12 noon Eastern time (~35% of total FX volume)
New York – 8 AM through 5 PM Eastern time (~20% of total FX volume)
Sydney – 5 PM through 2 AM Eastern time (~4% of total FX volume)
Tokyo – 7 PM through 4 AM Eastern time (~6% of total FX volume)
The above information can be utilized in several ways. The more trades that are being executed during a given time (all things being equal), the narrower the Bid/Ask spreads will be. Greater liquidity results in a narrower spread.
Also, we see that between the hours of 8 AM and 11 AM Eastern US time, the two largest markets (London and New York) overlap one another for about 3 hours. This represents a key trading time slot for many traders. Keep in mind that each trading day will be different from every other and there are no guarantees that this time frame will generate incredible trades on a regular basis. However, with the London and New York markets open and trading simultaneously, more trading opportunities often present themselves.
While we see an overlap between the trading hours of the Tokyo and Sydney markets, it is not as significant as the London and New York overlap due to the significantly lower overall trading volume.
Weekend Trading
While the FX market technically never closes, virtually all of the major banks and trading entities do close for the weekend. The volume over the weekend is so small that it tends not to offer much trading opportunity for traders. While some activity can occur depending on fundamental news that may occur over the weekend, generally any movement in the currency pairs is negligible, and trading liquidity is extremely thin, making trade execution difficult and spreads very wide. Hence, the FXCM Trading Station closes at 4 PM Eastern time on Friday and opens again at 5 PM Eastern Time on Sunday.
Given differences among traders, some will keep positions open over the weekend while others will close all open positions before 4 PM Eastern on Friday.
You should now have the information that you need to understand trading hours in the currency market.
FX BUSINESS 