Introduction to Forex

For those of you that are new to the foreign exchange (Forex) market, it is important to familiarize yourselves with this market’s characteristics and unique attributes. The Forex market allows traders to buy and sell distinct currency pairs. We also supply our traders with the possibility to trade with Commodities and indexes. No commission is charged per trade, the broker is compensated through the buy and sell price differential – commonly known as the “spread”. Below are a few guidelines to start trading with Advanced Currency Markets – your gateway to the largest and most liquid market on earth.

What is Forex ?

Forex is the largest marketplace in the world with more than 4 trillion dollars changing hands daily; making it one of the most attractive and lucrative markets. The Forex market allows you to buy and sell currencies against each other and speculate on the differences in exchange rates. Making a transaction on the Forex market is like trading in any other market.

Forex terminology

The Forex market is a specific market, and like many other financial markets it has its own language and practices.

Throughout the following pages and the links below, you will learn the appropriate terminology that ought to be used whilst trading Forex.  

• The Forex Glossary  , lists in alphabetical order all terms related to the forex market and used daily by all market participants.
• The Forex Guide
• Video Tutorials

Open a position

In order for you to understand the following mechanisms, we would like to remind you that all the amounts quoted in this section are after leverage application amounts.

Buying/Selling - B/S

If you want to open a position (i.e.: place an order to sell – to make a profit if the exchange rate falls) you have to choose the volume (i.e.: 1/0.1 /0.01) from the drop down menu on the platform and then click either on the “SELL” or “BUY” Button.

This will open a position in the market and you will receive an immediate notification of it in your MetaTrader 4 terminal.

To close an open position, you will  have to reopen your active trade and click on the “CLOSE” button. This will in fact apply to the opposite order that you made before.

Different order types also exist to open or close a position under a certain condition.

The spread

As with any market, for each currency pair, there are 2 prices. The difference between them is called the spread.

The spread is measured in points or pips, which is the lowest decimal figure in a currency rate.

For a EURUSD, a pip equals 0.0001 (or 10 dollars on 100,000), for EURJPY a pip equals 0.01 (or 1000 yen on 100,000).

Learn more about  P/L calculation on the SPREADS page .

Forex currencies quotation system

Currencies are quoted in pairs, for example – EUR/USD or USD/JPY. The first currency in the pair is called the base currency and the second is called the counter currency.

The base currency is the ‘basis’ for purchases and sales.
For example, if you buy EUR/USD, then you acquire Euros and sell Dollars. You shall do this if you expect the Euro to gain value against the Dollar.

It is also possible for a currency pair to be quoted as USD/EUR, but this quotation is extremely rare.

Each transaction must have 2 sides – a buy and a sell (or a sell and a buy).
By this, we mean that it is impossible to buy 100,000 EUR/USD and then exchange it for another currency pair (i.e.: EUR/JPY) without closing the first position.

Also please note that no physical currency delivery will be made. For these purposes banks and exchange companies, which specialize in low-rate currency conversions are available.

An “on the spot” market

Forex market working hours

The Forex market, based on ‘spot’ transactions, is unique in comparison with all other global markets because trading takes place 24 hours a day, 5 days a week. Financial centers are open for work, and banks and other organizations exchange currencies in different parts of the world for different purposes.

Therefore, trading never stops apart from a short break during the weekend. Early closings are possible depending on calendar arrangement such as, for example, Christmas or New Year’s Eve.

Rollover of positions (swap)

Except for “Islamic account” terms, an overnight trade will incur swap costs. 

Market Orders

A market order is an order to buy or sell at the current market price. The execution of the order is instantaneous. If needed you can also place a market order over the phone, by reaching the Dealing room which usually takes a few more seconds.

Limit Orders

• A limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. The trader specifies the price at which he wishes to buy/sell a certain currency pair and also specifies the duration that the order should remain active.
• GTC (Good Till Cancelled): A GTC order remains active in the market until the trader decides to cancel it. The dealer will not cancel the order at any time therefore it is the customer's responsibility to remember that he put the order.
• GTD (Good Till Date): A GTD order remains active in the market until the end of the expiration date you set.

Stop orders

• A stop order is also an order placed to buy or sell at a certain price. The order contains the same two variables, price and duration. The main difference between a limit order and a stop order is that stop orders are usually used to limit loss potential on a transaction whilst limit orders are used to enter the market, add to a pre-existing position and profit taking. The same variations are used to specify duration as in limit orders (GTC and GTD).

Learn more about the iHForex Stop Loss policy

Example: Trader x Buys EUR/USD 100,000 at 0.9340, he is expecting a 60 to 70 pip move in the market, but he wants to protect himself in case he has overestimated the potential strength of the Euro. He knows that 0.9310 is a support level so he places a stop loss order to sell at that level. Trader x has limited his risk on this particular trade to 30 pips or US 300 $.

Another usage of a stop order is when a trader is expecting a price breakout to occur and wishes to grasp the opportunity to 'ride' the breakout. In this case, he will place an order to buy or sell 'on stop'.

Example: Trader x sees EUR/USD breaking through the 0.9390 resistance level. He believes that if this happens, the price of EUR/USD could be headed to 0.9450 or over. At this point the market is at 0.9350 so trader x places an order to initiate a buying position of 500,000 at 0.9392 'on stop'.

Note: Stops are guaranteed in Forex within regular market conditions. At a time of fast market gaps or market opening, there may be changes regarding the close price. Stop orders also at opening or fast market will be executed, but the order may not be filled at the desired price. As a result, the initial risk can be estimated but not guaranteed. During times of extreme volatility it can be difficult or impossible to execute the requested price.

Profit and Loss calculation

Approximate USD values for a 1 pip move per contract in our traded currency pairs are as follows, per 100,000 units of the base currency:

On a typical day, liquid currency pairs like EUR/USD and USD/JPY can fluctuate up to a full point (0.0100 -  100 pips). On a EUR 1,000,000 position a full point on EUR/USD equates to 10,000 USD.