XkyXword Forex For Beginners

Team
http://
www.
twitter
.com/
Xkyx
word

Provided by
XkyXword Forex For Beginners

2
 Provided by

Table of Contents

What is Forex? ............................... 4

Why Do So Many Trader s Mov e To or Focus on Forex? ................................ ...... 6

Trading FX – What Dri v es the Forex Market ....................... 7

The Bulls and the Bears – Dec i di ng What to Buy and Sell .............. 8

Reading a Forex Q uote ..... 9

What is a ‘Pip’? ............................... 9

Two -Sided Pairs , T wo -S i ded Trades ............. 9

‘Going Short’ ................................ ...................... 10

Pip Values & Lot Si z i ng .......................... 10

Margin & Leverage ................................ .......... 11

Anatomy of a Forex Trade, O pen to Cl os e ................................ .......... 12

Next Steps ................................ ... 13

www.Xkyxword.c
om
3
 Provided by

What is Forex?

Forex is short for Foreign-Exchange , a n d it is t h e l a r ges t m a rk et o n t h e Pl a n et

E art h. While many i nv es tors , parti c ul arl y many in Western economies may be more -aware
of equity and stoc k mark ets , Forex pl ay s a key role in the constantly evolving relationship
of global trade.

Ev e n if y o u do n’t k n ow it – you’ve probably already placed a Forex trade . Hav e

y ou ev e r withdra wn mon ey from an ATM in a foreign country in a foreign currency? Well –
that was a Forex trade. If y ou’ v e fl own i nto an international airport and seen the airport
kiosks with flashi ng rates , thos e are al l bids and offers to place an FX tr ade. Even if you
haven’t travelled out of c ountry , y ou’ v e l ikely purchased a good or service onlin e from a
merchant in another c ountry . Wel l , there’s a Forex transaction behind that sale.

Forex is like oil for the gears of global trade. A nd as gl o baliz at i on h as f u rt he r

t ak e n - h ol d of the wo rld, the neces si ty for FX to faci li tate those trading relati onships has
never been more i mportant. If a J apanes e automobile manufacturer wants to sell a car in
the United States – the USD/J P Y ex c hange rate is going to be pretty important to the
success of their bus i ness . If the Dol l ar s trength ens, this is good for the Japanese auto
manufacturer – as they c an now bri ng back more Yen f o r ev ery c a r s old in t he U nit e d
St at es , giv e n t h e s t r o ng e r U. S. D oll a r. B ut if t h e e x c ha n g e r at e w e ak e ns
– this auto manufac turer may be forc ed to take a loss on the sale of that car, and for no faul t of
their
own, as they were s i mpl y the v i c ti m of a ‘bad forex trade’.

But no dialed -in, i nternati onal c ompany is going to remain vulnerable to such unchecked
market f o rc es . I g n ori n g ex c h a n g e rat es c o uld ris k t he v e ry s uc c es s of t h e ir b us in es s t o a
many companies are actively
f ac t o r t h at t h ey c o ul d r ea s on a bl e c ont r ol f o r. S o
trading in FX markets in order to address the risk of constantly
changing valuations in their local currency .

But this is just one motiv ati on for one particularly important participant in the market. In
many cases, the auto manufac turer themselves are going to outsource this work to one of
the major banks wi th a h eav y f oc us o n F o rei g n Ex c h a n g e t r a ns ac t io ns . A nd gi v e n t he
v ol at ilit y t h at c a n of t e n e ma n at e f r om these mark ets, this will also attract many hedge funds
or pension funds wi th s ome el ement of a speculative bent.

Collectively, this activity from these ‘major’ market participants is what makes
FX the largest market in the world.

4
What is FX 2 - How to Trade FX
As we mentioned earl i er, many peopl e pl ace Forex trades every single day without ever
knowing it. But for thos e that do k nowi ngly trade FX – the purpose is fairly clear: for profit
– just as with any other mark et -bas ed ty pe of investment.

Let’s go back to that ai rport k i os k ex ample: And let’s say that you’ve just arrived in New
York after a red -ey e fl i g ht from London, and you know that you’re going to need to
exchange some of y our Bri ti s h P o un ds i nt o U. S. Dol la rs i n o rd e r t o h av e s om e p oc k et c as h
f o r t ra ns ac t i on s . B ut y ou’ r e uns u r e of h o w much you’ll need, so you simply take everything
out of your wall et and exc hange it i nto U.S. Dol lars ; and that jus t happens to be £400.00.

Bid Ask
1 .2 4 0 0 1 .2 5 0 0
( p ric e a t w hic h y ou c a n s e ll) (price at which you ca n buy)

At the time of the ex c hange, the ai rport kiosk was displaying a rate of 1.2400 x 1.2500 for
transactions from the Bri ti s h Pound to the U.S. Dollar. This would be very similar to a
Forex quote with a rel ev ant bi d and as k , separated by the ‘spread’ between the two prices.
The first price i s the amount that the ai rport kiosk would be willing to buy GBP/USD f rom
you while the hi gher, or s ec ond pri c e i s the rate at which they’d be willing to sell. So, you,
as the customer, buy at the hi gher pri c e and sell at the lo wer price… th e airport kiosk
always earns the s pread.

Another way to read thi s quote from the airport kiosk would be: ‘we are willing to pay
1.2400 in U.S. Doll ars f or every 1 Britis h Pound you hav e – but if you want to buy British
pounds from us, i t’ s go ing to be at a rate of 1.2 500 for every 1 GBP that you want.’ The
difference between thes e two amounts i s the ‘spread,’ and this is vitally important for
traders to follow – but w e’ l l get to that i n a moment.

You exchange y our £400.00 for $496.00 (400 x 1 .24) and then leave the airport to go and
enjoy the beauti ful weather i n New York City.

But while enjoy i ng al l of that beauti ful weather, you realize that much of NYC is wired to
accept credit cards . So y ou don’ t real l y need any of your cash, and the $496 .00 remains
unfettered in your wall et for the duration of your trip. Now it’ s ti me to g o back home, and
you decide you want to get y our G BP back so that you can actually use your cash at home.
You go to the s ame ai rport k i os k – but now prices have changed as the British Pound has
dropped in value s i nc e when y ou’ d arri v ed in New York.

www.Xkyxword.c
om
5
 Provided by

G BP/US D Rate
Bid Ask
1 .2 2 0 0 1 .2 3 0 0
( p ric e a t w hic h y ou c a n s e ll) (price at which you ca n buy)

No w t h e ai rp o rt k i os k r e a ds 1. 2 2 0 0 x 1. 2 3 0 0 f o r G B P/ U S D ex c h a ng es . A nd y ou t ak e o ut y o u r
$ 49 6, a n d hand i t to the agent at the k i osk, and they give you back £403.25 – amounting to
a net profit of almos t
£3.25 on the transac tion – and al l y ou had to do was hold that cash in your wallet for a
week. Curiously , y ou pos e a befuddl ed l ook to the attendant at the airport kiosk
currency exchange and ex pl ai n that they must’ve made a mistake as you’d only given
them £400 and are now getti ng bac k a full £3.25 extra – almost a 1% return in just a
single week!

You ask the attendant at the k i os k to ex plain the transaction; and they share that during
this week that y ou were i n New York , the British Pound dropped in value by 200 pips
(equivalent to 2 c ents ) agai ns t the U.S. Dollar. This means that by having ‘invested’ in the
U.S. Dollar ra ther than t he Bri ti s h Pound, you w ere able to profit off of t he drop in the
exchange rate. So, whe n y ou traded i n y our British Pounds, you did so at a rate when
every British Pound was worth $1.2500. But no w that the British Pound has fallen in value
with each Britis h Pound now returni ng $1.2300, you profited off of the t ransaction. And
when the attendant tak es y our $496 to exchange it back into British Pounds, the lower rate
of 1.2300 means that y ou’ re goi ng to get back £403.25 (496 X (1/1.2300 )).

At that point, you get the i dea that s pec ulating on currencies can be a viable ‘endeavor’
as the daily mov ements i n a c urrenc y ’ s value or price can allow for profit to be had from
astute obser vati on and ti mi ng.

This is the enterpri s e that many of the world’s largest investors – whether they’re banks
or insurance compani es or auto manufac turers or stay -at-home Mom’s or Dad’s managing
a personal tradi ng ac c ount – are al l try i ng to do. The bulk o f the $5 tril li on per day
exchanged in the FX mark et c omes wi th a profit -seeking, loss -aversion backdrop.

Why Do So Many Traders Move to or Focus on Forex?

As with equities , the prol i ferati on of c omputers and subsequently the creation of the
internet p o pu la riz e d t he f iel d of F o r ei gn - Ex c ha n g e t r adi n g. S om e of t he u ni qu e as p ec t s of t h e
FX m a rk et a r e parti c ul ar l y attrac ti v e to market participants, such as:

- FX Never Sleeps, this is a 24 -hour market b ec a us e wh e n L on d o n c los es f o r

b us in es s , b ank s i n t h e U nit ed St at es ar e f u r nis hi n g p ric es . An d as t h e U. S. c los es f o r t h e
d ay , liq ui dit y b egi ns t o f l ow f r o m N e w Ze al a n d, A us t rali a a n d t he n, ev e nt u ally , As i a;
p r od uc i n g a t r uly ‘ al way s o pe n’ m a rk et fo r FX tra ders.

6
- Go long or short – there are no s hares to borrow and no ‘hypothecation’ that needs to
take place when goi ng ‘ s hort’ on a Forex -pair. The two-si ded pairing of many FX
instruments also affo rds an extra level of flexibility . Do you want to short the British
Pound? Well, you c an c hoos e to do that against the U.S. Dollar or the J apanese Yen or to
the Euro. You get hav e many opti ons to choose from.

– this is particul arl y attrac ti v e to profes s ional -level investors as the inevitable costs of
placing trades c an pl ac e a l a rg e d e nt i nt o a t r a d e r’s pr of it s . T r ad es a r e s o me of t h e l ow es t -
c os t v e hic l es t h at i nv es t o rs c an work wi th given the massive liquidity a nd substantial size
and depth that often exis ts i n these mark ets.

- Un - p a r all ele d li q ui dit y – as m e nt i o ne d e a rli e r, over $5 Trillion per day turns over
in the Forex market a n d t his m e a ns t h at m os t maj o r F X m a rk et s r e m ai n wi d ely - of f er e d
t h r ou g h o ut t he day . A l ac k of l i qui di ty c an be a dangerous prospect for a trader as this can
increase the ‘sharpnes s’ of mov es gi v en the thinned number of bids or offers in a market.
Such ‘violent’ pri c e movements c an j us t as surely work against a trader as for them. The
addit ional liquidi ty that’s often av ai l abl e in FX therefore can act as a ‘buffer’ for price
action.
- Available leverage : borrowed funds can fa st become a detriment if miss -used, and
we’ll talk about this in more detail later. Leverage giv es the trader flexi bil ity for bolstering
amplitude. If a trader w ants to s pec ul ate on a move more aggressively, they can institute
more leverage. But thi s c an be dangerous as higher degrees of leverage accelerat es the
‘velocity’ of a trade.
In FX – you get to c ontr ol y our own l ev erage up to 50x in most jurisdictions. And while
most pr of es s i on al t r a d e r s wo ul d a g re e t h at 50x l e v e ra g e is t o o a g g r es s iv e f o r a p r of es s io n al
a pp r o ac h – in F X, y ou g et to dec i de.

Trading FX – What Drives the Forex Market?

Currencies trade on the open mark et, j ust like many other asset classes like stocks or
bonds or commodi ti es . Throughout the trading day, prices on currencies will fluctuate
based on supply and demand. If s omethi ng ‘good ’ happens for an economy, investors will
generally respond wi th more b uy in g. T h at in t u r ns i nc r e as es d e ma n d at giv en l ev els of
s up ply , t h e r eby i nc r eas i n g p ric es u nt il s u p ply a nd d em a n d ar e r o u ghly - b al a nc e d a g ai n. O r, if
s om et hi n g ‘b a d ‘ h a pp e ns , inv es t o rs w ill f ac t o r t h a t n ew i nf o rm at i o n i n by s elli n g t h e c u r re nc y ,
whic h i nc r eas es s up ply a t t his giv e n p ric e. A n i nc r e as e i n s u pply would br ing prices lower
until buyers stepped -i n to add s upport and, again, we’d have equilibrium in the supply and
demand for tha t c urrenc y at that moment in time at that specific price.

Let’s take the Brex i t v ote i n J une 2016 as an example. When voters in the U.K. elected to
leave the European Uni on, the i mmedi ate response was one of fear as investors sold -out
of GBP -based inv es tm ents . Al l of thos e orders to sell (supply) rapidly filtered into price as
the quote on G BP/US D f ell by more than 15 c ents (1,500 pi ps) agains t the U.S. Doll ar in a
single night, from 1.50 al l the way down to 1.3 500.

The general motivator for currency price movements are interest rates, or implications
thereof…

As an economy ’ s perf ormanc e i mprov es, interest rates will genera lly be increased to
temper inflationary pres s ures . But i t’ s those increasing rates that really get currency
traders excited, as thi s c ou ld b ri ng o n a s y n e r gi s t ic rel at i o ns hi p t hat c an , pot e nt i ally , las t f o r
mo nt hs o r ev e n y e a rs . A s int e r es t rates move -higher, the demand to invest in that economy
will generally inc reas e i n order to c apture the c onsequently higher rates of return. As this
demand builds, s o does demand for the native currency, fueling an advance in exchange
rates to match l oc al c api tal mark ets .

Investors can ev en earn (or pay ) i nterest while being in a forex trade, reflected in the
‘swap rate’. Thi s i s the i nteres t rate di fferenti al between rep resentative economies in a
Forex quote, and we ex pl ai n thi s l ater i n more detail.

7
Bullish and the Bearsish – Deciding What to Buy and Sell
As mentioned abov e, i nteres t rates are one of t he most common drivers for currency
prices, but to put i t more ac c uratel y , i t i s ‘expectations for potential changes in interest
rates’ that really dri v es matters . Let’ s c onsider an example: if data signaled a remarkably
strong development for an ec onomy – l et’s say that GDP in the U.K . far outpaced what was
expected – the s pec ul ati on wi l l i n turn weigh in.

While this one, i ndi v i dual G DP pri nt may not cause the Bank of England to hike interest
rates, it can start the bal l rol l i ng. The s tronger economic figure may in turn raise the
prospect of inflati on. It i s that el ev ated price pressu re that may eventually cause the BoE
to hike rates fas ter than they woul d hav e otherw ise. So this would generate an increase in
expectations for hi gher i nteres t rates which in turn motivate traders and investors to buy
the British Pound (and l oc al as s ets ) on the belief that the rate of retur n is going to ris e in
the near future.

The higher prices i n the Bri ti s h Pound, at this point, would be ‘Bullish’, reflecting the
burgeoning up - trend that’ s tak i ng pl ac e to account for stronger GDP a nd rate
expectations . Shoul d data c onti nue to c ome -in stronger, this ‘bullish’ price action can
continue. If pers i s tent enough, the res ul t could be a true ‘bullish’ up -trend in the
price/value of the c urrenc y .

If the ex ampl e were to be reversed – wi th the expectation for low er inter est rates – the
result is more li k el y to dri v e c urrenc y v alues lower. Such expectations were evidenced
after the June 2016 Bre x i t referendum. After th e vote deciding to withdrawal the UK f rom
the European Uni on, Ba nk of Engl and G overnor Mark Carney warned m arkets that the
BoE was not goi ng to ta k e ri s k s from the referendum lightly. They would proactively look
to offset those ri s k s by dec reas i ng i nterest rates. In short order, sellers returned to drive
the value in the Bri ti s h Pound ev en -l ower, from a value of 1.3500 just before the
‘warning’ to around 1.2000 i n the months after. This is clear bearish anticipatory price
action.

This is the simpl i fi ed i nterpretati on of the relationship that drives most buying and selling
decisions in the FX mark et. Do y ou thi nk that economic prospects in Europe will improve?
If so, you could buy the Euro. And as those prospects do indeed improve, prices will likely
move up to reflec t the i nc reas ed demand preempting inflationary pressure that could
prompt high er rates . O r, i f y ou thi nk that Europe’s economic prospects are worsening, you
can sell the Euro to tak e adv antage of an eventual slide in rates that promotes a decline in
the market.
Reading a Quote
The quote conv enti on for the Forex market is one of the few areas that’ s markedly different than
many
other markets, but after a l i ttl e i nv es ti gation it often becomes quite simple for most investors .
FX trades take the pros pec t of detai l a s tep further…. But before we ge t to that we have to poi nt
out an important elem ent of termi nology in the FX market, and that’s the term ‘pip’ .

One of the most important terms that’s unique to FX: Pip

Pip stands for ‘ perc entage i n poi nt,’ and this is the prima ry unit of measurement in a forex quote.
In a
U. S. D oll a r d e n om in at e d - q uot e i n w hic h U SD is t h e ‘ qu ot e c u r re nc y ’ ( a ny p ai ri ng w h e re ‘ U SD’
is lis t ed second), the thi rd and fourth di git after the decimal will show the number of ‘pips’
in that quote.

If GBP/US D is tradi ng a t 1.2345, thi s i s the same as saying ‘one British pound is worth
one dollar, 23 c ents , and 45/100 t h ’ s of a cent’. If the price in GBP/USD increases to
1.2355, that would be a gain of 10 pi ps (1/10th of a cent). If pric e were to rise to 1.2445,
that would be a 100 -pi p (one c ent) gai n from the prior value of 1.2345.
GBP/US D
‘The Value of O ne B riti sh Pound, quote d in te rms of U. S. Dolla rs’
G BP is t he ba s e , o r t ra ns a c t io n c u r re nc y in
t he pa i r US D is t he q u o t e , or c o u nt e r
c u rre nc y in t he pa ir
T he p ric e of G BP/ U SD mov i n g hi g he r me a ns B rit is h P o un ds a re St r o n ge r, a n d U.S.
Dolla rs w e a k e r The p ric e of G B P/U S D m ov i ng d ow n me a ns B rit is h P ou n ds a re w e a k e r,
a nd U. S. D olla rs s t r o n g e r

Every Forex quote c omes as a pai r s o that we can see what that base currency’s price is
being defined ag ai ns t . G B P/ U S D is o n e of t he m o r e c o m mo n p ai ri ngs , a n d it s p airi n g is t h e
s am e as s ay i n g ‘t h e v al u e of B rit is h P ou n ds , q uot e d in U. S. Doll a rs ’. EU R/ GB P is a n ot h e r
c om m on p ai ri n g, an d t his is t h e v al u e of one Euro , as quo ted in British Pounds. Or let’s say
we wanted to pl ac e a tr ade wi th an Aus tralian f ocus: We could look at GBP/AUD , which is
the value of one Pound quoted i n Aus tralian Dollars.

Two-Sided Pairs, Two-Sided Trades

So, to recap: the fi rs t c urrenc y i n the pair is called the ‘base’ currency, and this is the
instrument being quoted i n that pri c e; while the second currency in the pair is the ‘counter’
currency, and thi s i s what the bas e c urrency is being quoted in. So, for example, the quote
for GBP/JPY woul d be the val ue of one Britis h Pound as quoted i n Japanes e Yen,
reflected as ¥140.00 to s how that eac h British Pound was worth 140 Y en (¥).

9
While an exchange ri s es and fal l s s i mply enough, the values of both currencies do change
in de p e n d ent ly . E u r os a r e g oin g u p a nd d o w n t h r o u gh o ut t h e day , as a r e U . S. D oll a rs an d J a p an es e
Y en
– and traders shoul d s eek pai ri ngs that would offer the best leverage to support their view
for direction. So, i f the i nv es tor wanted to buy British Pounds as they are bullish on the
currency’s outlook , they woul d want to pair that currency against a counterpart that they
expect to be weak .

As an example, i f an i nves to r ex pec ted the Australian economy to be weaker –

they could buy G BP/AUD; or buy Bri ti s h Pound s against Australian Dollars.

Or – alternativel y – i f the i nv es tor was ‘ bearish’ on Europe’s economic prospects, they

could sell Euros and buy Bri ti s h Pounds . This would be employed by ‘going short’
EUR/GBP , whic h i s the equi v al ent of s el ling Euros in terms of British Pounds.

In this last exampl e, the i nv es tor hopes that the EUR/GB P exchange rate (its price) goes
lower, at which poi nt th ey c oul d ‘ c ov er’ the tr ade at the lower price, allowing for profit in
the short position tak i ng the di fferenc e between the higher entry price and the lower exit
price.
Going Short
Entering a short pos i ti on i n the s toc k market can be challenging. Before you can place the
trade, you first need to fi nd a brok er that will let you borrow the shares in the first place.
Following that, ex ec uti ng the s hort pos i tion is usually going to come with some
restric tions, suc h as the ‘ upti c k rul e’ . And even should you meet all these criteria, you’re
often going to hav e to pay i nterest for ‘borrowin g’ the s hares at ‘brokers cal l’ rates, whic h
are usually higher than di s c ount or pri me rates.

Suffice it to say , betti ng agai ns t s toc k s usually isn’t as easy as buying them.

Forex is quite a bi t di fferent bec aus e i n every quote, in each trade, investors are
always ‘long’ one c urrenc y and ‘ s hort’ another. Let’s go back to that GBP/AU D
example:

If investors were opti mi s ti c on Bri ti s h ec onomic prospects, at least more so than they are
on Australian growth pr os pec ts , they c an look to buy GBP/AUD. But if i nvestors are more -
pessimistic on the U.K.’ s ec o n o mic p r os pec t s as o pp os e d t o A us t r ali a’s , a s h o rt p os it i on
c ou ld b e ex ec ut e d i n w hi c h t h e i nv es t or s ells GB P/AU D. Let’s say this happens at a price of
1.7000, and you go s hort for 10 lots or 100k.

In this hypotheti c al s hort G BP/AU D pos i tion, the investor would be short British Pounds,
and long Austral i an Dol l ars . Eac h pi p i n the quote would be worth appro ximately 58.8
pence (1/1.7000 = 0. 5 88 2 ). A n d, c o ns id e ri n g t he inv es t o r h as 1 0 l ot s , e ac h pip g ai n e d o r l os t
wo ul d m ea n a p p rox i m at el y
£5.88 of change to the inv estors acc ount.

Let’s say two months l ater, the i nv es tor closes out the trade at a lower l evel of 1.6000.
This would be a total mov ement of 1,000 pips, and the investor can close the position at
the lower price to garne r the equi v al ent gain. Further, given of the pip value of 58.8 pence
per pip, each lot woul d’ v e brought
£588.24 to the inv estor. On a 10 l ot posi tion, that would tal ly a total gai n of £5,882.35 on the
‘short’trade.

Pip Values
This is an extremel y i mportant as pec t of the Forex market to understand, and that’s the
value of a pip from quote to quote. Ev ery currency pair is priced in terms of the counter
currency. So if ‘ USD’ i s the s ec ond c urrency in the quote, that cur rency pair is being
quoted in terms of U.S. Doll ars. As another exam ple, i f the Australi an Doll ar is l is ted
second, as we s aw abov e wi th G BP/A UD, the tra de is being priced in -terms of Australian
Dollars.

10
Again, if you are ev er c onfus ed, j us t read the quote aloud as ‘the value of (first currency)
priced in terms of (s ec ond c urrenc y )’ .

For U.K. t raders us i ng a G BP -bas ed ac c ount, the pip value for each pip in GBP/USD can be
found by
dividing ‘1’ by the quote its elf. So if G BP/US D i s tradi ng at 1.2500, the pi p value for GBP -bas ed
traders
would be ‘1/1.2500 =0 8’ . So, eac h pi p of movement in GBP/USD would be worth 80 pence, or
0.8 GBP.

If we wanted to fi nd the v al ue of eac h pi p in the GBP/AUD quote, we can follow the same
procedure. We c a n div id e ‘ 1/ G B P AU D q uot e’. L et ’s as s u m e a v al u e of 1. 7 0 00 f o r G BP/ A UD, at
whic h p oi nt , t h e pi p v alu e w o ul d b e ‘1/ 1. 7 0 0 0 = 0 . 5 88’. S o, e ac h pi p of m o v em e nt i n G B P/ AU D
wo ul d b e w o rt h 5 8. 8 p e n c e, or 0.588 G BP.

Lot sizing
As you can probabl y i magi ne, traders don’t usually get excited by a gain of a few cents or
pence. But, with l ev erage and l ot s i z i ng – that movement of only a few cents can really
stack up t o bring s ome s i gni fi c ant gai n (or damage) to a trader’s account.

Each currency pai r i s denomi nated i n a ‘ base lot size’ that carries a ‘pip value’ for each pip’ s
worth of
movement in that s pec i fi c c urrenc y pai r, just as we saw above with GB P/AU D carrying a pip
value of
0.588 for GBP-bas ed tr aders . Eac h l ot also carries a ‘minimum margin requirement’, and thi s i s
the
amount of risk c api tal requi red to mai ntain the position.

Margin
Margin is the capi tal that the brok er must hold in order to secure a positi on. This amount
will differ from c urrenc y pai r to c urrenc y pair, but will generally be a percentage of the
overall size of the trade.

Let’s assume a margi n fac tor of 2% for positions.

L et ’s als o as s u m e t hat t h e t r ad e r w ant e d t o b uy 5 0, 00 0 i n G BP/ U SD. T his wo ul d b e r ef e r r e d t o

as t h e ‘lot size’ of the tr ade.
And then let’s as s ume a c ros s rate of 1.2400 in GBP/USD at the time.

As we mentioned earl i er, thi s quote i s pricing GBP in terms of the U.S . Dollar. And if the
going rate at a gi v en ti me i s 1.2400, that’s saying that each British Pound is worth One
Dollar and 24 c ents . So thi s t ra d e t o t r ans ac t £ 5 0, 00 0 w o uld b e w ort h $ 6 2, 00 0 ( 5 0, 0 00 X 1. 2 4
= 62, 0 0 0 ). This is c a lle d t he n ot i ona l value of t he trade.
The minimum margi n requi rement for thi s trade, if using 2% as a margin factor,
would be $1,240 ($62,0 00 x .02).

We can also expres s this amount i n G BP equivalent by using th e exchange rate of 1.2400 in
GBP/USD .
$1,240 would be worth £1,000 (or 2% of £50,00 0).

When our trader pl ac es the trade, thi s amount will be drawn from the account and
earmarked for thi s p os it io n as ‘ m a rgi n’. O nc e t h e t r a de is c l os ed, t his ma r gi n c o m es b ac k t o
t h e t ra d e r’s ac c o u nt an d c an be us ed again. But, if in the course of trading, the position
loses value to depl ete the trader’ s equi ty – to where he or she only has the margin
securing the trade remai ni ng – thi s trader will face a ‘margin call’ as there would not be
enough capi tal i n the account to c ontinue s upporting the posi tion.

Margin Call – When the trader’ s ac c ount value falls below the margin requirement
of held positions . Thi s leads to a l i qui dation of the account from the broker; known as
the dreaded ‘Margi n Cal l ’ .
Leverage
Leverage is the amount of funds borrowed from or used from the broker. Let’s assume that
our trader in the abov e pos i ti on had opened their account with £2,000, and is currently
trading a £50,000 pos i ti on.

The leverage on thi s trade c an be ex pressed as 25:1. Or, to put it other wise, the trader is
controlling
£25 of capi tal for every £1 i n their acc ount.

Remember, margi n had to be put up i n order to secure the position before it was ever
executed, and that amount was $1,240 (or £1,0 00). This means that our trader would have
£1,000 in ‘ free margin’, or capi tal that i sn’ t currently ti ed-up in securing a position. This is
capital that can be us ed to purs ue new positions or to support currently -held trades.

Anatomy of a Forex Trade – Start to Finish

To close our New to For ex G ui de, we’ re going to walk through a complete hypothetical trade,
from
start to finish us i ng EUR/US D.

L et ’s as s um e a bi d/ as k r at e of 1. 1 0 0 0 x 1. 1 0 0 5, a ma r gi n f ac t o r of 2 %, a n d a n e wly op e n e d
ac c o u nt with $2,000 .

O u r tr a de r d eci d es th a t t h ey wa nt t o pl a ce a s h o r t E UR / U S D t ra d e f o r €2 0 , 00 0.

B ec a us e t he q u ot e is E u r o’s pric e d i n t er ms of U. S. D oll a rs , €2 0, 0 0 0 w o ul d be t h e s am e as

$ 22, 0 0 0. W e are us i ng t he bi d pri c e – fi rst in the quote – since our trader is opening a
short position). The $22,000 woul d be the notional size of the lot.

The marg in to open the pos i ti on woul d be $440 ($22,000 x 0.02). This would leave our trader
with
$1,560 in free or ‘avai labl e’ m argin.
The pip value on the pos i ti on woul d be $2.00 per pip, since this is a U.S. Dollar
denominated ac c ount and we’ re tradi ng a pair based in U.S. Dollars. S o, the $1,560 that
the trader has in free margi n woul d al l ow for 78 0 pips to be lost before a margin call
would happen ($1,560/2 = 780).

But let’s assume that the hy potheti c al trade found its way into the money. With a slide, the pri c e
on
EUR/ USD went down to 1.0805 x 1.0810, and the trader decided they wanted to close the lot.

They’d have to buy back to c ov er the position, which would be done at the second rate in the
quote, or
the ‘ask price’.
Our trader woul d be c ov eri ng €20,000 at a rate of 1.0810, for total proceeds of $21,620;
amounting to
a net gain of 190 pips .

The original cos t of the trade was $22,000; but now the trader covers t he position at a value of
$21,620 – leadi ng to a $ 380 di fferenc e which would be realized as profit on the trader’s short
position.

Once the trade i s c l os ed, the margi n i s returned to the account and the trader’s net account
value is now $2,380.

Next Steps
By now, you hav e l earned many of the basics th at helps a trader familiarize to navigating
any market, Fo r ex i nc lu d e d. M a ny pr of es s i on al t r a de rs c o ns id e r m ark et s a lif e -l on g l e a r nin g
p r oc es s , v ery s i mil ar t o dri v i ng. At fi rs t, even driving at low speeds on abandoned roads
can be risky and s c ary . But i n ti me, as the mechanics of operating an automobile become
a little more comfortabl e, we c an fl y by motorists on the highway without so much as a
worry in the worl d. Ex peri enc e hel ps bri ng familiarity and comfort.

At Xk y x w o r d, w e’ re h e r e t o s h a r e o u r ex p e ri en c e wit h y o u. Af t e r y o u’v e le a r n ed t h e b as ic
mec h a nic s a n d termi nol ogy of the market along with the operable fu nctionality of your
trading platform, y ou’ re ready to s tart directi ng and refining your a nalysis in o rder to
make better tradi ng dec i s i ons .
Disclaimer
Xkyxword Market O pin ions
Any opinions, news , res earc h, anal y s es , prices, or other information contained in this
report is p r ov id e d as ge n e ral m a rk et c o mm e nt a ry , a nd d o es not c o ns t it ut e inv es t m e nt
a dv ic e. Xk y x w o r d will n ot ac c ept l i abi l i ty for any loss or damage, including without
limitation to, any l os s of profi t, whi c h may arise directly or indirectly from use of or
reliance on suc h i nformati on.

Accuracy of In formatio n
The content in thi s report i s s ubj ec t to c hange at any time without notice, and is provided
for the sole p u rp os e of a s s is t ing t r a d ers t o m ak e in de p e n d ent i nv es t m e nt d ec is io ns . Xk y x w o rd
h as t ak e n r eas o n a ble me as ures to ens ure the accuracy of the information in the report,
however, does not guarantee i ts ac c uracy, and will not accept liability for any loss or
damage which may ari se di rec tl y or i ndi rectly from the content or your inability to access
the website, for any del ay i n or fai l ure of the transmission or the receipt of any instruction
or notifications s ent through thi s webs i te.

Distribu tion
This report is not i ntended for di s tri buti on, or use by, any person in any country where
such distribution or us e woul d be c ontrary to local law or regulation. No ne of the servi ces
or investments referred to i n thi s report are available to persons residing in any country
where the provi s i on of s uc h s erv i c es or investments would be contrary to local law or
regulation. It is the res pons i bi l i ty of v i si tors to this websit e to ascertain the terms of and
comply with any l oc al l aw or regul ati on to which they are subject.

High Risk Inves tment

Trading foreign ex c hange on margi n c arries a high level of risk, and may not be suitable
for all inv es t o rs . T he hi g h de g r e e of l ev e r a g e c a n wo rk a g ai ns t y o u as w ell as f o r y o u. Bef o r e
d ec idi n g t o t r ad e forei gn ex c hange y ou s hould carefully consider your investment
objectives, level of ex peri enc e, and ri s k appetite. The possibility exists that you could
sustain losses i n ex c ess of y our i ni t i al i nvestment.
Y ou s h o ul d b e a w ar e of all t h e ris k s as s oc i at e d wit h f o r ei g n ex c h a n ge t r a din g, a n d s e ek a dv ic e f r om
a n independent fi nanc i al adv i s or i f y ou have any doubts.
www.Xkyxword.c
om
14