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Thursday, December 13, 2018

Forex Basics

Off-exchange Foreign Currency Trading is the simultaneous buying of one currency and selling of another. The foreign exchange market (FOREX) is the largest financial market in the world, with a volume of over $1.5 trillion daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location, no central exchange. It operates through an electronic network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another across the major financial centers.

Traditionally, investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971.
Forex Advantages

EFX Group understands the needs of retail traders. Through MB Trading Futures, we provide an advanced proprietary trading platform, rapid order execution, the narrowest price spreads, live access to vital market information, and superior customer support.

* 24-hour market - A trader may take advantage of the market around the clock. There is no waiting for the opening bell. We're open 5:00pm on Sunday through 4:30pm EST on Friday.
* High liquidity - The Forex market has an average trading volume of over $1.5 trillion per day, making it the most liquid market in the world.
* Low transaction cost - The retail commission on a Forex trade is as low as $0.00005 (x) currency value traded with no minimum charge.
* Uncorrelated to the stock market - A trade in the Forex market involves selling or buying one currency against another. There is limited correlation between the foreign currency market and the stock market. A bull market or a bear market for a currency is defined in terms of the outlook for its relative value against other currencies. If the outlook is positive, we have a bull market in which a trader profits by buying that currency against other currencies. Conversely, if the outlook is pessimistic, we have a bear market for that currency and traders may profit by selling the currency against other currencies.
* Inter-bank market - The backbone of the Forex market consists of a global network of dealers. They are mainly major commercial banks that communicate and trade with one another and with their clients through electronic networks and telephones. There are no organized exchanges to serve as a central location to facilitate transactions the way the New York Stock Exchange serves the equity markets. The Forex market is referred to as an over the counter (OTC) market.
* No one can corner the market - The Forex market is so vast and has so many participants that no single entity, not even a central bank, can control the market price for an extended period of time. As the market has grown even central bank interventions have become increasingly ineffectual and short lived as a tool for controlling the value of a particular currency.

About Forex Spreads/Pairs
What is a pip?

Pip stands for point-in-percentage. The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context normally one basis point (0.0001 in the case of EUR/USD, GBP/USD, USD/CHF and 0.01 in the case of USD/JPY).
Spreads

Fixed spreads are a way for an FCM to markup or markdown the best bid or offer. FCMs do this to hide their fee into the price of the currency pair instead of displaying their best quote. Common sense tells you that no one works for free, so when you see an FCM claim they have “no commission” that should be a red flag. So how are they getting paid? Its simple... they are making money with the built-in markup/markdown in the spread.

Our FCM, MB Trading Futures, has nothing to hide. They offer tighter spreads with no markups/markdowns and openly display a low commission rate.
Currency Pairs

In the Forex market, trading is always in currency pairs, such as EUR/USD or USD/JPY. The base currency-the first currency listed in the currency pair-is the basis for the buy or the sell. As an example, the US Dollar is the base currency for USD/JPY (US Dollar/Japanese Yen). The current bid/ask price for USD/JPY could be 107.20/107.23, which means you could buy $1 US for 107.23 Japanese Yen, or sell $1 US for 107.20 Japanese Yen.


If the equity in an account falls below the required margin, then all open trades will be closed at the prevailing market rate.
Glossary

Base currency: The base currency is the first currency in a currency pair, and the currency that remains constant when determining a currency pair's price. Knowing the base currency is important as it determines the values of currencies (notional or real) exchanged when a foreign exchange deal is transacted.

The Euro is the dominant base currency against all other global currencies. As a result, currency pairs against the EUR will be identified as EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD, etc. The British Pound is next in the hierarchy of currency names. The major currency pairs versus the GBP would therefore be identified as GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD. The USD is the next dominant base currency. USD/CAD, USD/JPY, USD/CHF would be the normal currency pair convention for the major currencies, the dollar quoted as EUR/USD and GBP/USD.

Basis: The difference between the spot price and the futures price.

Basis point: One hundredth of a percentage point.

Bid /Ask Spread: The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads normally signify higher liquidity.

Cable: Trader jargon for the British Pound Sterling referring to the Sterling/US Dollar exchange rate. Term began due to the fact that the rate was originally transmitted via a transatlantic cable starting in the mid 1800's.

Central bank: The principal monetary authority of a nation, controlled by the national government. It is responsible for issuing currency, setting monetary policy, interest rates, exchange rate policy and the regulation and supervision of the private banking sector. The Federal Reserve is the central bank of the United States. Others include the European Central Bank, Bank of England, and the Bank of Japan.

Conversion: The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

Cross rates: An exchange rate between two currencies. The cross rate is said to be non-standard in the country where the currency pair is quoted. For example, in the US , a GBP/CHF quote would be considered a cross rate, whereas in the UK or Switzerland it would be one of the primary currency pairs traded.

Currency: A country's unit of exchange issued by their government or central bank whose value is the basis for trade.

Currency (exchange rate) risk: The risk of incurring losses resulting from an adverse change in exchange rates.

Devaluation: Lowering of the value of a country's currency relative to the currencies of other nations. When a nation devalues its currency, the goods it imports become more expensive, while its exports become less expensive abroad and thus more competitive.

Drawdown: The magnitude of a decline in account value, either in percentage or dollar terms, as measured from peak to subsequent trough. For example, if a trader's account increased in value from $10,000 to $20,000, then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown of $5000 (incurred when the account declined from $20,000 to $15,000) even though that trader's account was never in a loss position from inception.

End of day (mark to market): Traders account for their positions in two ways: accrual or mark-to-market. An accrual system accounts only for cash flows when they occur, hence, it only shows a profit or loss when realized. The mark-to-market method values the trader`s book at the end of each working day using the closing market rates or revaluation rates. Any profit or loss is booked and the trader will start the next day with a net position.

Euro: The currency of the European Monetary Union (EMU), which replaced the European Currency Unit (ECU). The countries currently participating in the EMU are Germany , France , Belgium , Luxembourg , Austria , Finland , Ireland , the Netherlands , Greece , Italy , Spain and Turkey .

Exchange rate: The price of one currency stated in terms of another currency. Example: $1 Canadian Dollar (CDN) = $0.7700 US Dollar (USD)

Fixed exchange rate: A country's decision to tie the value of its currency to another country's currency, gold (or another commodity) , or a basket of currencies . In practice, even fixed exchange rates fluctuate between definite upper and lower bands, leading to intervention.

Foreign exchange (Forex): The simultaneous buying of one currency and selling of another in an over-the-counter market.

G-7: The seven leading industrial countries, being US, Germany, Japan, France, UK, Canada, and Italy.

G-10: G7 plus Belgium , Netherlands and Sweden , a group associated with the IMF discussions. Switzerland is sometimes peripherally involved.

G-20: A group composed of the Finance Ministers and central bankers of the following 20 countries: Argentina , Australia , Brazil , Canada , China , France , Germany , India , Indonesia , Italy , Japan , Mexico , Russia , Saudi Arabia , South Africa , South Korea , Turkey , the United Kingdom , the United States and the European Union. The IMF and the World Bank also participate. The G-20 was set up to respond to the financial turmoil of 1997-99 through the development of policies that “promote international financial stability”.

Hedge fund: This is a private, unregulated investment fund for wealthy investors (minimum investments typically begin at US$1 million) specializing in high risk, short-term speculation on bonds, currencies, stock options and derivatives.

Hedging: A strategy designed to reduce investment risk using call options, put options, short-selling, or futures contracts. A hedge can help lock in profits. Its purpose is to reduce the volatility of a portfolio by reducing the risk of loss.

London Inter-Bank Offer Rate or LIBOR: The standard for the interest rate that banks charge each other for loans (usually in Eurodollars ). This rate is applicable to the short-term international interbank deposit market, and applies to very large loans borrowed from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.

Leverage: The degree to which an investor or business is utilizing borrowed money. The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade. For example, if the notional amount traded (also referred to as “lot size” or “contract value”) is $100,000 dollars and the required margin is $2000, the trader can trade with 50 times leverage ($100,000/$2000). For investors, leverage means buying on margin to enhance return on value without increasing investment. Leveraged investing can be extremely risky because you can lose not only your money, but the money you borrowed as well.

Liquidity: The ability of a market to accept large transactions. A function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.

Long: Position to purchase a greater amount of currency than is sold, therefore, an appreciation in value if market price increases.

Margin: Funds that customers must deposit as collateral to cover any potential losses from adverse movements in prices.

Margin Call: A requirement for additional funds or other collateral, from a broker or dealer, to increase margin to a necessary level to guarantee performance on a position that has moved against the customer.

Market Maker: A dealer that supplies prices, and is prepared to buy and sell at those bid and ask prices.

Mil: An absolute one tenth of one penny; $0.001. There are typically ten Pips to one Mil.

Pip (tick): The term used in currency markets to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).

Position: A view expressed by a trader through the buying or selling of currencies, and can also refer to the amount of currency either owned or owed by an investor.

Premium (cost of carry): The cost or benefit associated with carrying an open position from one day to the next calculated by using the differential in short-term interest rates between the two currencies in the currency pair.

Revaluation: An increase in the foreign exchange value of a currency that is pegged to other currencies or gold.

Revaluation rates: The rate for any period or currency, which is used to revalue a position or book. The revaluation rates are the market rates used when a trader runs an end-of-day to establish profit and loss for the day.

Rollover: The settlement of a deal is rolled forward to another value date with the cost of this process based on the interest rate differential of the two currencies. An overnight swap, specifically the next business day against the following business day.

Short: To sell a currency without actually owning it, and to hold a short position with expectations that the price will decrease so that it can be bought back at a later time at a profit.

Spread: The difference between the bid and offer (ask) prices of a currency; used to measure market liquidity. Narrower spreads usually signify high liquidity.

Spot Price: Current market price. Settlement of spot transactions normally occurs within two business days.

Swaps: A foreign exchange swap is a trade that combines both a spot and a forward transaction into one deal, or two forward trades with different maturity dates.

Uptick: A new price quote that is higher than the preceding quote for the same currency.
Forex Order Types
Limit

An order to buy or to sell at a specified price. A buy limit order can only be executed at the limit price or lower (better), and a sell limit order can only be executed at the limit price or higher (better). If you placed a buy limit order, the fill price would be at your limit price of better, meaning that it would be better to buy at a lower price compared to the submitted limit price. It would be better to sell at your limit price or better, meaning selling at a higher price. Remember that your limit order can possibly not be executed because the market price may quickly surpass your limit price before your order can be filled. But by using a limit order you also protect yourself from buying the currency at too high a price.

Example #1: The bid/ask of the EUR/USD is currently 1.1895 x 1.1896. If you would like to establish a long position at the current ask price, then your limit price will be set to the current ask price, 1.1896.

Potential Scenario: The bid/ask of the EUR/USD is currently 1.1895 x 1.1896. If you place a buy limit order at a limit price of 1.1896, but during this time the bid/ask changed to 1.1894 x 1.1895, then you can expect your order to be executed at the best ask at that time. Therefore, if the current ask is 1.1895, a limit order to buy at 1.1896 would result in an execution at 1.1895. This execution at a lower price is commonly referred to as a price improvement.

Example #2: The bid/ask of the EUR/USD is currently 1.1895 x 1.1896. If you place a buy limit order at 1.1899, your order will be filled at whatever the best ask is at that time (as long as the ask is equal to or better (less) than your limit price). So if the best ask was 1.1896, then you could expect a 1.1896 fill price when placing a buy limit order at 1.1899 (to place a limit order to buy above the current ask, refer to Stop Limit or TTO order types).

Example #3: The bid/ask of the EUR/USD is 1.1895 x 1.1896. If you place a sell order at 1.1890, your order will be filled at whatever the best bid is at that time. So if the best bid was 1.1895, then you could expect a 1.1895 fill price when placing a sell limit order at 1.1890. (To place a limit price above the current ask price, refer to Stop Limit or TTO order types).

Example #4: The bid/ask of the EUR/USD is 1.1895 x 1.1896. If you place a sell limit order at 1.1899, your order will stay live until the bid price rises to your submitted limit price of 1.1899.
Market

An order to buy or to sell at the current market price. The advantage of a market order: you can almost always expect your order to be executed (as long as there are willing buyers and sellers). The disadvantage: the price you pay when your order is executed may not always be the price you obtained from a real-time quote service or were quoted by a broker. This may be especially true in fast-moving markets where currency prices are more volatile. When you place an order "at the market," execution usually occurs immediately and market execution prices can differ from the currently displayed quote.

Example: When you click the buy or sell market button, you can expect an order fill price at whatever price the market was at the time the participating bank received your order. This price may not be the same market price you may have noted when you initially placed the order.
Stop Market

Buy or sell at market once the price reaches or passes through a specified price. Used by traders who either have a position (long or short) and want to close the position if it moves against them OR by traders who wish to open a new position once the currency rises to a specific level. The stop price on a sell stop must be below the current bid. The stop price on a buy stop must be above the current offer. Stop orders do not guarantee you an execution at or near the stop price. Once triggered, the order competes with other incoming market orders.

Example: This order type is used mostly for protection. If we are long the EUR/USD at 1.1888, our concern is to not lose more than 10 pips to the downside (Pending trading strategy used). So we would enter a sell stop market order with a stop price of 1.1878.
Stop Limit

Works like a Stop Market order with one major exception. Once the order is activated (by the currency trading at or through the stop price), it does not become a market order. Instead, it becomes a limit order with a specified limit price. The advantage of this order is that you set a specified price at which your order can be filled. The disadvantage is that your order may not be filled. In this case, your exposure to loss will continue until the position is closed.

Example: This order type is used mostly for protection. If we are long the EUR/USD at 1.1888, our concern is to not lose more than 10 pips to the downside (Pending trade strategy used). However, we do not want to be filled via a market order, but rather be filled at a price we specify or better. In this case, we would choose the stop limit order type. You are prompted to enter your stop price and to enter a limit price. So if you set your stop price at 1.1880 with a limit to sell at 1.1878 then you would sell at your price of 1.1878 or better (higher than your limit) if executed.

Some trading strategies encourage a reasonable gap between your submitted stop and limit prices when using the stop limit order type. This is done as a precaution to increase the probability of execution of your limit price, and decrease the potential bypassing of your submitted limit price.
Time Triggers

Specify a time for your limit and market orders to go live.

Example: If you wanted to place a buy order based on the release of some news event. Specify the order parameters as you would, check the time parameter box and enter your specified time.
Trailing Stop

Ride a currency's price trend, profit from its movement, and limit your downside risk without constantly monitoring prices. Trailing stops move your stop price with the price of the currency and are server-sided, protecting you in the event you lose Internet connection.

When using the trailing stop, it is important to know the answer to the question: How do you represent a pip per currency pair? A pip is the last digit to the right of the decimal point in the current currency dealing rate.

Example #1: EUR/USD 1 pip = .0001

Example #2: USD/JPY 1 pip = .01

Example: It is very important to know how to represent 1 pip in each of the currency pairs traded when submitting a trailing stop order. If we are long the EUR/USD at a basis of 1.1888, we want to place a trailing stop by trailing the bid price by 12 pips. This trail offset for the EUR/USD is written as .0012. In contrast the same trail for the USD/JPY would be written as .12 as the trail offset. If we buy from the ask and sell to the bid, then when we are long our stop price would be set to 12 pips below the current bid at the time of submitting the order. If the bid price is 1.1887, then our initial stop price would be set to 1.1875. If the bid price increased to 1.1902, then our new stop price would be set to 1.1890. With this being said, please note that our trailing stops update based on a pip by pip movement. If the bid did move up to 1.1902, then immediately pulled back to 1.1890, the order would go live and sell at market.
Threshold Triggered Order (TTO)

Specify two prices, an upper and lower price trigger. Once the market trades at either price, a market order is sent to the marketplace. This order type was designed to help limit potential losses and lock-in potential profits.

Additional Explanation: Many Forex traders want to place one price trigger to take profits and one to stop out of their position at the same time, and they want whichever order is executed first to cancel the other part of the order automatically. The best order type to accommodate this strategy is the TTO. This order type allows you to set both an upper and lower price trigger. The system will send out a market order for whichever price trigger is met first.

It is important that you know how to place a stand-alone TTO. A stand-alone TTO is a TTO that is not a part of a combo order type (see combo orders below). To view the TTO OES (Order Entry Screen) window simply right-click on a blank gray-colored area of the OES and left-click on "Template" then "TTO". This will change the OES to allow you to place a stand-alone TTO. Please specify the correct number of lots, enter your desired upper and lower price triggers, then left-click buy/cover/sell or short order buttons depending on what type of order you want to send.

The upper price trigger is activated once a transaction prints at or above your trigger price. The lower price trigger is activated once a transaction prints at or below your trigger price.

Order Entry Screen Button Review:

1. Buy - Implies you have no open position in the pair currently loaded in the OES. Click buy to establish a new long position. If you have an open short position, clicking the buy order button will cover the open short position (If you are short, the "Buy" button should be named "Cover").
2. Cover - Used to close (cover) a short position and is the same action as the "Buy" button. If you have no open positions and click the "Cover" button a long position will be established (this button should be named "Buy" if you hold no open short position).
3. Sell - Implies you have an open long position in the pair currently loaded in the OES. Click this button to close a long position or establish a short position if you have no long position (if you have no long position "Sell" button should be named "Short").
4. Short - Click this order button to establish an open short position or sell a long position (if you have an open long position this button should be named "Sell").

Example: We place a buy market order to establish a long position. Once we are in the position, we want to place an order to take profit at XX price and/or to be stopped out at X price and have either one of the orders cancel the other upon execution. At this time you could select the TTO as the order type. This order type allows you to enter an upper trigger (to take profit on a long position or place a stop for a short position) and a lower trigger (stop on a long or take profit if short). Once the price of either trigger is met by either the bid or the ask the TTO is triggered and the system will send out a market order.

Example: We bought the EUR/USD at the market price of 1.1888. Our strategy is to take a profit at 30 pips above this price and/or to be stopped out 10 pips below. If we select the TTO as the order type (to sell) we would set our upper trigger at 1.1918 and our lower trigger at 1.1878. For whichever trigger price is met first by the bid or ask price, the system will send out a market order to sell. If for any reason you want to change either of your upper or lower triggers, you must cancel the order and replace a new TTO.
"Combo" Order Types

A combo order involves a combination of two different order types. Whatever the action of the first part of the combo order is (either buy or sell), the trading system will send out an opposite order when the first part receives an execution. If we place a buy Market + TTO, the system will send out a market order to buy, and upon execution of that buy market order the system will send out an auto-closing sell TTO. This explanation would be the exact opposite for a sell market + TTO, first part of the order is a sell, the second part is the buy (to cover).
Limit + TTO

This combo order type will initially place a limit order (either a buy or sell) and upon execution, places an opposite TTO (either a buy or sell). Note: Upon execution of any part of the initial limit order, an equal TTO is placed with your pre-set trigger prices. Please keep in mind that when the system sends out an equal TTO, you have to cancel and replace the TTO to change either the upper or lower trigger. With this being said, it is important to know how to place a stand-alone TTO (explained in the TTO section above).

Example: Buy limit + TTO when the limit price is to buy the EUR/USD at 1.1888. At the time you place this order to buy or sell, the system will prompt you to place an auto-closing TTO by entering in your upper and lower trigger. Upon execution of the first part of the order, the system will send out an automatic TTO.

If our strategy on our long position established at 1.1888 was to take profit +30 pips at 1.1918 (upper TTO trigger), and our stop (lower TTO trigger) would be set to -10 pips or 1.1878. If the current bid price is 1.1908, this would put us 20 pips in the money. Our rational at this point is to lock-in at least 10 to 15 pips, therefore we want to change the lower trigger of our auto-closing TTO. To make this change we need to cancel and replace the order. Once we cancelled the auto-closing TTO that was submitted based on execution of the first part of our combo order, we would need to go to the TTO template OES window to replace our new TTO. We would leave the upper trigger at 1.1918 to fulfill the +30 pips we are looking to capture, but change the lower trigger from 1.1878 to 1.1900. If the bid price were to pull back from 1.1908 to 1.1900, our lower trigger would be activated and lock-in a gain of 12 pips.

Note: Either the bid or ask price can activate your upper and lower price triggers. At the time the trigger is met the system sends out a market order.
Limit + Trailing Stop

Initially places a limit order on one side (either a buy or sell) and upon execution, places an opposite trailing stop on the other side (either a buy or sell). Note: Upon execution of any part of the initial limit order, an equal trailing stop is placed with your pre-set offset.

Note: It is very important that you understand how to represent the number of pips for your trailing offset for your trailing stop order when placing the trailing stop order. (See Trailing Stop order type explanation)
Limit + Stop Market

Initially places a limit order on one side (either a buy or sell) and upon execution, places an opposite stop market order for the other side (either a buy or sell).
Market + TTO

Initially places a market order (either a buy or sell) and upon execution, places an opposite TTO (either a buy or sell). Note: Upon execution of any part of the initial market order, an equal TTO is placed with your pre-set stop prices. To change either of your TTO price trigger parameters you must cancel and replace the order. Either the bid or ask price can trigger your upper and lower price triggers. At the time the trigger is met the system sends out a market order.
Market + Trailing Stop

Initially places a market order (either a buy or sell) and upon execution, places an opposite trailing stop (either a buy or sell). Note: Upon execution of any part of the initial market order, an equal trailing stop is placed with your pre-set offset. You must know how to represent the number of pips of your trail offset per currency pair.
Stop Limit + TTO

Initially places a stop limit order (either a buy or sell), which works like a Stop Market order with one major exception. Once the order is activated (by the currency trading at or through the stop price), it does not become a market order. Instead, it becomes a limit order with a specified limit price. Your order fill price will be either at your specified limit price or better. Upon execution of the first part of the combo order, the system will place an opposite TTO (either a buy or sell). To change either of your TTO price trigger parameters you must cancel and replace the order. Note: Either the bid or ask price can trigger your upper and lower price triggers. At the time the trigger is met the system sends out a market order.
Stop + TTO

Initially places a stop market order (either a buy or sell) and upon execution, places an opposite TTO (either a buy or sell). Note: Upon execution of any part of the initial stop order, an equal TTO is placed with your pre-set stop prices. To change either the upper or lower trigger you must cancel and replace the TTO. To change either of your TTO price trigger parameters you must cancel and replace the order. Note: Either the bid or ask price can trigger your upper and lower price triggers. At the time the trigger is met the system sends out a market order.
Stop + Trailing Stop

Initially places a Stop Market order (either a buy or sell) and upon execution, places an opposite Trailing Stop order (either a buy or sell). Note: You must know how to represent the number of pips of your "trail offset" per currency pair. At the time you place a buy Stop + Trailing stop you would enter your desired stop price to enter the position. When this buy stop price is reached by the market (in this case the ask) a market order to buy will be triggered. Upon execution of this first part of the combo order the system will send out an auto-closing trailing stop (reflecting the trailing offset you selected when first placing the order).

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