Trading with GFS Platform (You trade yourself)

Synopsis
GFS provides a Forex Trading Platform with unique properties to facilitate real time trading. GFS immediately offsets all client trades with a bank or institutional liquidity provider and therefore they will never trade "against" their clients, GFS offers traders a high level of execution that is unmatched in the marketplace.
The following section provides more information on the advantages and workings of the OperaFX trading platform. Once you have read through the information why not try out their live demo account?



Execution
GFS offers traders the highest possible level of price transparency using real time streaming quotes, and a speed of execution that is unmatched in the marketplace. Clients simply click on the current bid or offer, deals are confirmed instantaneously, and all trading activity is tracked on screen in real time, including current open positions, real time profit and loss, margin availability, account balances, and all historical transaction details.
One of the primary reasons GFS has captured such a large institutional client base is the reliability of our prices and our fills. Our relationships with the world’s largest FX banks and liquidity providers allow our clients to directly access the global currency markets. This deep liquidity pool attracts those who require the ability to execute institutional size deals. With straight through processing (STP) even the largest orders are almost always filled at the displayed price.



Competitive Spreads and STP
Straight Through Processing (STP) - No Dealing Desk execution combines the benefits of direct access to the interbank market with the convenience and speed of GFS’s proprietary platform, OperaFX. GFS does not trade against our clients. We offer every client, including both retail and institutional, equal access to the interbank market. GFS does not have a need to know your positions, so stop and limit orders are never targeted or “hunted”. Traders rarely receive a “requoted” price on our STP platform, with the exception of extreme market volatility. Knowing that GFS only generates revenue off of the spread of the currency pair, and never takes the other side of any trades, our clients can be confident that we share an interest in their success.

Basically, we don't have a dealing desk and we don’t trade against our clients. When you want to buy or sell, the price that you see on the screen is the price that you will get. All your orders go straight to our liquidity providers like Goldman Sachs, Bank of America and Deutsche Bank, etc.

However, when you are dealing with a dealing desk firm. You are trading against them. They're going to process the orders that are more favorable to them, because they profit from you losses and the spreads. All your losses go straight to the broker and all you profit goes to the liquidity providers. When you could have lost 50$, you might have lost 80$. When you could have won $100, you might have won $60. There is a CONFLICT OF INTEREST when your broker is trading against you.

The fact that unlike most of our competitors we use STP has resulted in us having 0 complaints in our 10 year history. To have background information on our firm and other firms I recommend you visit the NFA (National Futures Association) website at: http://www.nfa.futures.org/basicnet/



Full Back Office
GFS has a highly sophisticated yet simple to use back office system for both retail and institutional clients. GFS handles all administrative and account management responsibilities including; real time trading activity, month end reporting, order history, floating P&L, rebate accumulation, multiple account management, accepting and approving all new customer account applications, fund transfers, and account inquiries. GFS provides access to a real-time Back Office reporting system 24 hours a day. In addition, OperaFX software eliminates individual trade overhead costs including trade confirmation, account statement processing, and margin control. Customers of IBs can login to their own trading account and view all account details at any time. While GFS takes care of all of your service and back office needs, you will be able to focus your energies on the areas that will grow your business.

Client Support
With 24 hour access to our customer and technical support team, through our website, live chat, email, and telephone, you will receive immediate service and support whenever you need it. Our multilingual Customer Service Department is on hand to answer any account questions you may have. IBs can utilize our IT, Sales, Back Office and Marketing teams’ expertise at any time. GFS Forex & Futures supports its clients, Introducing Brokers, and partners through every of stage of business development which includes set up, launch, and continuous training and marketing. For partners seeking co-branding, we can package the trading platform with your own corporate image, customizing your front end setup, website integration and hosting.

OperaFX – Spot Market Trading Platform
Our unwavering commitment to technological innovation has driven us to create OperaFX Pro – one of the most advanced products on the market. A friendly and sophisticated platform that caters to beginners as well as experienced traders and professionals, OperaFX provides unrivaled electronic trading tools and 24 hour access to the Forex market with superior execution.

As a proprietary platform, GFS can customize OperaFX to meet the requirements of your specific trading style. With numerous built-in customizable options and the ability to add, remove, or create features according to your specifications, OperaFX meets the needs of every Spot market trader.



Platform Features

A. View live streaming quotes of our STP prices

B. Multiple workspaces allow you to save different configurations of your trading setup

C. Orders can be placed directly from the quote list, the advanced price display, or directly off the chart

D. Select from a wide variety of drawing tools to insert Fibonacci levels, trend lines, and more, right onto your charts

E. All open positions are labeled on the charts so that you can easily follow the progress of your trades

F. Our customizable menu allows you to choose the color, layout, and style. You can also insert onto the charts numerous studies and indicators that are pre-installed on the platform. If you have a proprietary or specific indicator that you want to trade with, GFS will add it onto the platform for your own customized version.

G. Easily adjust the size of your orders. With 100:1 leverage, the number of lots you trade at a time gives you the ability to manage your risk

H. Follow your open positions, floating P/L, and add stop or limit orders with ease

I. The real time Dow Jones news source will keep you on top of the latest information related to the Forex market

J. The Historical Trading Log helps you manage your positions and review your past performance

What do I have to know and do to trade in Forex?

To become a successful Forex Trader we recommend the following:

Maximize Your Tools
It is of the utmost importance to know your tools. The varius brokers offers an array of tools that are used for trading the Forex markets. Be sure to test any demo accounts offered and use the opportunity to "learn" the tool.

Risk Management
Every successful trader should know how much risk he is willing to take, and what profits should result from the trade. This is the basis of every realistic trading strategy.

Two Ways to Trade
There are two types of traders, technical and fundamental. Both have a radically different approach to making trading decisions.

The Basics of Technical Analysis
All technical analysis starts with a few basic building blocks. With these as a foundation, you can start to make sound trading decisions.

Fundamentals Everyone Should Know
All Traders should understand why economic releases, interest rates, and international trade are important to movements in the currency market.

Psychology of Trading
The biggest enemy to most traders is not the market, but themselves. Study and learn all you can about Forex trading.

Forex Trading - Abbreviations [......3]

Point
0.0001 of a unit; for instance, if the GBP/USD is 1.5220, then 1.5219 is one point lower

Political Risk
The potential for losses arising from a change in government policy.

Premium
In options, the price of a call or a put, which the buyer initially pays to the option writer.

Price Risk (Market Risk)
The risk of a fall in the market value of a foreign investment (as measured in the domestic currency of the investor) due to an adverse change in the value of the currency of the investment.

Principal
The counterparty that sells and buys currencies for his own account as opposed to a broker who introduces a buyer to a seller and vice versa.

Purchasing Power Parity
The proposition that over the long term, changes in the exchange rate between two currencies are the result of differences in the relative rate of inflation in the two countries concerned.

Put
In options, the buyer of a put has the right to acquire a short position in the underlying contract at the strike price until the option expires; the seller (writer) of a put obligates himself to take a long position in the contract at the strike price if the buyer exercises his put.

Resistance
A price level at which you would expect selling to take place due to technical analysis. The resistance level of one currency is the support level for the other.

Risk Neutrality
An attitude that risks should neither be sought nor avoided, but should be accepted whenever they arise.

Rollover
Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies.

Settlement
Actual exchange of base currency and currency between principal and client.

Short
A market position where the client has sold a currency he does not already own. Normally expressed in base currency terms, e.g. short US dollars (long Deutsch marks).

Soft Currency
A currency which is expected to devalue or depreciate against other currencies, or whose exchange rate must be supported by central bank intervention or exchange controls.

Speculation
Buying or selling currency in expectation of an exchange rate movement, so as to make a profit, either in the same market or between two different markets, e.g. forex cash markets and derivatives markets.

Spot
Spot means that the settlement date of a deal is two business days forward.

Spread
The difference in prices between bid and offer rates.

Stop Loss Order (or Stop)
An order to buy or sell when a particular price is reached, either above or below the price that prevailed when the order was given.

Strike Price
For call options, the specified price at which the buyer has the right to purchase the underlying contract.

Structural Hedging
The process of reducing or eliminating currency exposure by matching receivables and payables in each currency or currency bloc to minimise the net exposure.

Support
Price level at which you expect buying to take place. See resistance.

Swap
An agreement between two parties to exchange a series of future payments. In a currency swap, the exchange of payments (cash flow) are in two currencies, one of which is often the US dollar.

Swift
The society for Worldwide International Fund Transfers is a multinational facility for fund transfers based in Belgium and the Netherlands.

Technical Analysis
Analysis based on market action through chart study, moving averages, volume, open interest, oscillators, formations, stochastics and other technical indicators.

Thin Trading
When the volumes of currency bought and sold are low.

Time Value
In options, the value of the premium is based on the amount of time left before the contract expires and the volatility of the underlying contract. Time value represents that portion of the premium in excess of intrinsic value. Time value diminishes as the expiration of the option draws near and/or if the underlying contract's price development becomes less volatile.

Two-Way Price
Rates for which both a bid and offer are quoted.

US Prime Rate
The rate at which US banks will lend to their prime corporate customers.

Value Date
Settlement date of a spot or forward deal.

Volatility
A measure of price fluctuation.

Forex Trading - Abbreviations [2......continued]

Fed
Abbreviation for Federal Reserve System of the United States. In the domestic context Fed usually refers to its board of governors or to the Federal Reserve Bank of New York; in the foreign exchange context it usually refers to the latter.

Federal Open Market Committee
Key decision making committee of the Federal Reserve System. The minutes of its meeting are published about a month later, and show the current stance of US monetary policy.

Figure
Dealers' slang meaning "00" and denoting and.

Fixed Exchange rate
Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower intervention points.

Flat/Square
Where a client has not traded in that currency or where an earlier deal is reversed thereby creating a neutral (flat) position.

Floating Exchange Rate
When the value of a currency is decided by supply and demand.

Forex
An abbreviation for foreign exchange also FX.

Forward Points
The interest rate differential between two currencies expressed in exchange rate points. These forward points are added to or subtracted from the spot rate to give the forward or outright rate.

Forward Rate
The rate at which a foreign exchange contract is struck today for settlement at a specified future date.

Fundamental Analysis
Analysis based on economic factors.

Future
A contract giving the obligation to buy or sell an asset at a set date in the future.

GTC "Good Till Cancelled"
An order left with a dealer to buy or sell at a fixed price. It holds until cancelled.

Hard Currency
A currency whose value is expected to remain stable or increase in terms of other currencies.

Hedging
A hedging transaction is one which protects an asset or liability against a fluctuation in the foreign exchange rate.

IMF
International Monetary Fund

Initial Margin
The deposit required before a client can transact a deal.

Interest Parity
The interest parity theory is if there are two financial instruments in different currencies but identical in risk and maturity (e.g. three month UK gilts and Us Treasury bills), then a difference in the interest rate on the instruments will be reflected in the premium or discount for the forward exchange rate.

In-the-Money
In call options, when the strike price is below the price of the underlying contract. In put options, when the strike price is above the price of the underlying contract. In-the-Money options are the most expensive options because the premium includes intrinsic value.

Intrinsic Value
For in-the-money call and put options, the difference between the strike price and the underlying contract price.

Leads and Lags
Process of accelerating (leads) or slowing up (lags) foreign exchange payments or receipts when a change in exchange rates is expected.

Leverage
Facility whereby a small margin deposit can control a much larger total contract value, a mechanism which determines the ability to make extraordinary profits at the same time as keeping the risk capital to a minimum.

Limit Order
An order given which has restrictions upon its execution. The client specifies a price and the order can be executed only if the market reaches that price.

Lombard Rate
German term for the rate of interest charged for loans against the security of pledged paper. Particularly used by Bundesbank, which normally maintains its Lombard rate at about 1/2% above its discount rate.

London Interbank Offered Rate (LIBOR)
The interest rate at which banks in London are prepared to lend funds to first-class banks.

Long Position
A position where the client has bought a currency he does not already own. Normally expressed in base currency terms, e.g. long US dollars (short Deutsch marks).

Margin
Cash or guarantee deposited by a client wishing to trade.

Maturity
Date for settlement

Not Held Basis Order
An order whereby the price may trade through or even better than the client's desired level, but the principal is not held responsible if the order is not executed.

Offer
The rate at which a dealer is willing to sell the base currency.

One Cancels Other (OCO) Order
Where the execution of one order automatically cancels a previous order.

Open Position
Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date.

Option
The right, but not the obligation, to buy or sell an asset, such as currency, on or before a set of future date.

Out-of-the Money
Option calls with strike prices above the price of the underlying contracts, and puts with strike prices below the price of the underlying contracts.

Outright Forward
Foreign Exchange transaction involving either the purchase or the sale of a currency for settlement at a future date.

Outright Rate
The forward rate of a foreign exchange deal.

Overnight Trading
Refers to a purchase or sale between 9:00 pm and 7:00 am.

Over-the-Counter Transaction (OTC)
A transaction arranged by direct negotiation, usually by telephone, rather than on an exchange.

Forex Trading - Abbreviations [1....continued]

Arbitrage
Dealing in two or more markets at the same time (or in similar products in the same market) to take advantage of temporary mispricing in order to make a profit.

At-the-Money
In options, when the strike price equals the price of the underlying contract.

Bear
A person who believes that prices will decline.

Bear Market
A market characterized by declining prices.

Bid
The rate at which a dealer is willing to buy the vase currency.

Big Figure
The first three digits of an exchange rate, e.g. USD 1.62 per pound or DEM 1.49 per dollar.

Bull
A person who believes that prices will rise.

Bull Market
A market characterized by rising prices.

Cable
Dealer's slang for the UK sterling/US dollar exchange rate.

Call
An option that gives the buyer the right to long a position in the underlying contract at a specific price; the call writer (seller) may be assigned a short position in the underlying contract if the buyer exercises his call.

Call Rate
The overnight interest rate.

Cash Market
The market for the purchase and sale of physical currencies.

Convertible Currency
Currency which can be exchanged for other currencies of gold without authorization from the central bank.

Counterparties
The parties on either side of a transaction.

Cross Rate
Exchange rate that does not involve the US dollar.

Currency Clause
A clause in an export contract in which the sum payable is denominated in the buyer's currency; but the amount payable will vary with the exchange rate for the buyer's currency against the seller's currency.

Day Trading
Refers to opening and closing the same position or positions within one day's trading.

Delta
For options, also called the neutral hedge ratio. Expresses the expected change in the option price, given a one-unit change in the price of the underlying contract.

Derivative
Financial instruments, such as futures and options, which derive their value from underlying securities including bonds, bills, currencies, and equities.

Discount
Cheaper than the spot price, e.g. forward discount.

Dollar Rate
When a variable amount of a foreign currency is quoted against one unit of the US dollar, regardless of where the dealer is located or in what currency he is requesting a quote. The major exception is the UK sterling/US dollar rate cable which is quoted as units of the US dollar to UK sterling.

EMS
European Monetary System

ERM
Exchange Rate Mechanism

Eurobond
Marketable debt security issued outside the country in whose currency the debt is denominated.

Eurodollar
A dollar deposit acquired by a person or bank not residing in the United States and held outside the United States and therefore not subject to US reserve restrictions.

European Currency Unit
The currency unit in the EMS, where the unit is defined by the sum of quantities of each of the national currencies of the members of the EMS, so the value of the ECU changes in terms of third currencies, such as e.g. the US dollar.

Exchange Control
Government regulations restricting or forbidding certain types of foreign currency transactions including purchases from abroad, payment abroad of interest or dividends, and investing abroad.

Exchange Rate Depreciation
Currency which loses in value against one or more other currencies, especially if this happens in response to natural supply rather than by an official devaluation.

Exchange Rate Risk
The potential loss that could be incurred from a movement in exchange rates.

Exposure
A financial risk facing a business, which can be categorized according to its cause or source. Currency exposures are exposures to exchange rate risk.

Risks Inherent to Forex

High Risk Investment

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Trade with a Strategy

Trading successfully is by no means a simple matter. It requires time, market knowledge and market understanding and a large amount of self restraint.

Anyone who says you can consistently make money in foreign exchange markets is being untruthful. Foreign exchange by nature, is a volatile market. The practice of trading it by way of margin increases that volatility exponentially. We are therefore talking about a very 'fast market' which is naturally inconsistent. Following that precept, it is logical to say that in order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully but invariably there will be times where a traders' timing will be off. Don't loose heart if you loose on some trades. Experienced and seasoned traders do not expect to generate returns on every trade.

Let's enumerate what a trader needs to do in order to put the best chances for profitable trades on his side:


Trade with money you can afford to lose:

Trading forex markets is speculative and can result in loss, it is also exciting, exhilarating and can be addictive. The more you are 'involved with your money' the harder it is to make a clear-headed decision. Money you have earned is precious, but money you need to survive should never be traded.


If in doubt, stay out:

If you're unsure about a trade and find you're hesitating, stay on the sidelines.


Trade logical transaction sizes:

Margin trading allows the forex trader a very large amount of leverage, trading at full margin capacity can make for some very large profits or losses on an account. Scaling your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket.


Identify the state of the market:

What is the market doing? Is it trending upwards, downwards, is it in a trading range. Is the trend strong or weak, did it begin long ago or does it look like a new trend that's forming. Getting a clear picture of the market situation is laying the groundwork for a successful trade.


Determine what time frame you're trading on:

Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind's eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you're looking at. If you trade many times a day, there's no point basing your technical analysis on a daily graph, you'll probably want to analyse 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.


Time your trade:

You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are twofold, an expected market figure like CPI, retail sales or a federal reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur.


Gauge market sentiment:

Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term 'the trend is your friend', this basically means that if you're in the right direction with a strong trend you will make successful trades. This of course is very simplistic, a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is strong or weak.


Market expectation:

Market expection relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market, alternatively if the adverse happens, markets will usually react violently.


Use what other traders use:

In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa.

Use of a Margin (Can work "for" or "against" you)

Trading on a margined basis in foreign exchange is not a complicated concept as some may make it out to be. The easiest way to view margin trading is like this:

Essentially when a trader trades on margin he is using a free short-term credit allowance from the institution that is offering the margin. This short-term credit allowance is used to purchase an amount of currency that greatly exceeds the account value of the trader. Let's take the following example:

Example: Trader X has an account with EUR 50'000 with ACM. He trades ticket sizes of 1'000'000 EUR/USD. This equates to a margin ratio of 5% (50'000 is 5% of 1'000'000). How can trader x trade 20 times the amount of money he has at his disposal? The answer is that he temporarily receives the necessary credit to make the transaction he is interested in making. Without margin, trader X would only be able to buy or sell tickets of 50'000 at a time.

Margin serves as collateral to cover any losses that you might incur. Since nothing is actually being purchased or sold for delivery, the only requirement, and indeed the only real purpose for having funds in your account, is for sufficient margin.

We do not recommend trading with full 1% margin capacity as this engages a large amount of risk. Ultimately the choice is left to the trader to make transactions that meet his appetite for risk.

The important difference in Speculating or Investing

It is very important that the individual wanting to trade foreign exchange be aware of the very marked difference between speculation and investment. Foreign exchange trading is by nature a speculative occupation. Foreign exchange markets are amongst the most volatile markets in the world. When traded on a margined basis they effectively become the most volatile in the world.

Day trading in foreign exchange can be extremely profitable and high-risk profile traders can generate huge percentage returns even overnight. Day trading is however a mentally and psychologically challenging activity and is by no means meant for everyone. Day trading is essentially speculation and day traders essentially only do that: day trading. Most people who trade foreign exchange are not professional day traders however.

Often the contractors of foreign exchange brokerage services are professionals in some capacity or other. These people do not day trade but take the occasional position from time to time. This is also speculation and should not be confused with making an investment.

The conclusion here is that the nature of foreign exchange trading not lend itself as much to investment as it does to speculation and hedging (hedging may be performed in forward instruments). It is possible in a sense to make an investment in foreign exchange over a long-term period but this necessitates a large account value and low leveraging.

Forex Trading - Market Dynamics

The breadth, depth, and liquidity of the market are truly impressive. It has been estimated that the world's most active exchange rates like EURUSD and USDJPY can change up to 18,000 times during a single day.

Somewhere on the planet, financial centers are open for business, and banks and other institutions are trading the dollar and other currencies, every hour of the day and night, aside from possible minor gaps on weekends. In financial centers around the world, business hours overlap; as some centers close, others open and begin to trade.

The foreign exchange market follows the sun around the earth. Each business day arrives first in the Asia-Pacific financial centers; first Wellington, New Zealand, then Sydney, Australia, followed by Tokyo, Hong Kong, and Singapore. A few hours later, while markets remain active in those Asian centers, trading begins in Bahrain and elsewhere in the Middle East. Later still, when it is late in the business day in Tokyo, markets in Europe open for business. Subsequently, when it is early afternoon in Europe, trading in New York and other U.S. centers starts. Finally, completing the circle, when it is middle or late afternoon in the United States, the next day has arrived in the Asia-Pacific area, the first markets there have opened, and the process begins again.


1. Spot rate

A spot transaction is a straightforward (or outright) exchange of one currency for another. The spot rate is the current market price or 'cash' rate. Spot transactions do not require immediate settlement, or payment 'on the spot'. By convention, the settlement date, or value date, is the second business day after the deal date on which the transaction is made by the two parties.


2. Bid & ask

In the foreign exchange market (and essentially in all markets) there is a buying and selling price. It is important to perceive these prices as a reflection of market condition.

A market maker is expected to quote simultaneously for his customers both a price at which he is willing to buy (the bid) and a price at which he is willing to sell (the ask) standard amounts of any currency for which he is making a market.

Generally speaking the difference between the bid and ask rates reflect the level of liquidity in a certain instrument. On a normal trading day, the major currency pairs EURUSD, USDJPY, USDCHF and GBPUSD are traded by a multitude of market participant every few seconds. High liquidity means that there is always a seller for your buy and a buyer for your sell at actual prices.


3. Base currency and counter currency

Every foreign exchange transaction involves two currencies. It is important to keep straight which is the base currency and which is the counter currency. The counter currency is the numerator and the base currency is the denominator. When the counter currency increases, the base currency strengthens and becomes more expensive. When the counter currency decreases, the base currency weakens and becomes cheaper. In telephone trading communications, the base currency is always stated first. For example, a quotation for USDJPY means the US dollar is the base and the yen is the counter currency. In the case of GBPUSD (usually called 'cable') the British pound is the base and the US dollar is the counter currency.


4. Quotes in terms of base currency

Traders always think in terms of how much it costs to buy or sell the base currency. When a quote of 0.9150 / 53 is given that means that a trader can buy EUR against USD at 0.9153. If he is buying EURUSD for 1'000'000 at that rate he would have USD 915'300 in exchange for his million Euro. Of course traders are not actually interested in exchanging large amounts of different currency, their main focus is to buy at a low rate and sell at higher one.


5. Basis points or 'pips'

For most currencies, bid and offer quotes are carried down to the fourth decimal place. That represents one-hundredth of one percent, or 1/10,000th of the counter currency unit, usually called a 'pip'. However, for a few currency units that are relatively small in absolute value, such as the Japanese yen, quotes may be carried down to two decimal places and a 'pip' is 1/100th of the terms currency unit. In foreign exchange, a 'pip' is the smallest amount by which a price may fluctuate in that market.


6. Euro cross & cross rates

Euro cross rates are currency pairs that involve the Euro currency versus another currency. Examples of Euro crosses are EURJPY, EURCHF and GBPEUR. Currency pairs that involve neither the Euro nor the US dollar are called cross rates. Examples of cross rates are GBPJPY and CHFJPY. Of course hundreds of cross rates exist involving exotic currency pairs but they are often plagued by low liquidity. Ever since the Euro the number of liquid cross rates have decreased and have been replaced (to a certain extent) by Euro crosses.

Forex Trading - Main Markets

Foreign exchange is traded essentially in two distinctive ways. Over an organized exchange and 'over the counter'. Exchange traded foreign exchange represents a very small portion of the total foreign exchange market the great majority of foreign exchange deals being traded between banks and other market participants 'over the counter'.


1. Exchange traded currencies

In the case of an organized exchange like the Chicago Mercantile exchange (CME) in the US, standardized currency contract sizes that represent a certain monetary value are traded in the International money market (IMM). A central clearing house organizes matching of transactions between counter-parties.


2. Forex market

In comparison the over the counter market is traded around the world by a multitude of participants and price quality, reputation and trading conditions determine who a participant wishes to trade with. It is probably the most competitive market in the world and brokers must insure they live up to the highest standards of service and be compliant with market standards and practices if they want to acquire new customers and retain their existing ones. In 1998 a survey under the auspices of the Bank for International Settlements (BIS), global turnover of reporting dealers was estimated at about USD 1.49 trillion per day. In comparison, currency futures turnover was estimated at USD 12 billion.

Among the various financial centers around the world, the largest amount of foreign exchange trading takes place in the United Kingdom, even though that nation's currency, the British pound is less widely traded in the market than several others. The United Kingdom accounts for about 32 percent of the global total; the United States ranks a distant second with about 18 percent, and Japan is third with 8 percent.

Who participate in Forex Trading?

In the last years, the foreign exchange market has expanded from one where banks would execute transactions between themselves to one in which many other kinds of financial institutions like brokers and market-makers participate including non-financial corporations, investment firms, pension funds and hedge funds.

Its' focus has broadened from servicing importers and exporters to handling the vast amounts of overseas investment and other capital flows that currently take place. Lately foreign exchange day trading has become increasingly popular and various firms offer trading facilities to the small investor.

Foreign exchange is an 'over the counter' (OTC) market, that means that there is no central exchange and clearing house where orders are matched. Geographic trading 'centers' exist around the world however and are: (in order of importance) London, New York, Tokyo, Singapore, Frankfurt, Geneva & Zurich, Paris and Hong Kong. Essentially foreign exchange deals are made between participants on the basis of trust and reputation to deliver on an agreement. In the case of banks trading with one another, they do so solely on that basis. In the retail market, customers demand a written legally accepted contract between themselves and their broker in exchange of a deposit of funds on which basis the customer may trade.

Some market participants may be involved in the 'goods' market, conducting international transactions for the purchase or sale of merchandise. Some may be engaged in 'direct investment' in plant and equipment, or may be in the 'money market,' trading short-term debt instruments internationally. The various investors, hedgers, and speculators may be focused on any time period, from a few minutes to several years. But, whether official or private, and whether their motive be investing, hedging, speculating, arbitraging, paying for imports, or seeking to influence the rate, they are all part of the aggregate demand for and supply of the currencies involved, and they all play a role in determining the exchange rate at that moment.

Forex Trading - Advantages

Although the forex market is by far the largest and most liquid in the world, day traders have up to now focused on seeking profits in mainly stock and futures markets. This is mainly due to the restrictive nature of bank-offered forex trading services.

There are many advantages to trading spot foreign exchange as opposed to trading stocks and futures. Below are listed those main advantages.


1. Bid/Ask Spread rates

Spread rates have tightened dramatically in the last years. Most online forex brokers offer a spread of 5 pips on EURUSD which is the most widely traded and liquid currency pair.

In the futures market spreads can vary anywhere between 5 and 9 pips and can become even larger under illiquid market conditions (which tends to happen substantially more often in futures currencies).


2. Margins requirements

Usually a foreign exchange trading with a 1% margin is available. In layman's terms that means a trader can control a position of a value of USD 1'000'000 with a mere USD 10'000 in his account. By comparison, futures margins are not only constantly changing but are also often quite sizeable. Stocks are generally traded on a non-margined basis and when they are, it can be as restrictive as 50% or so.


3. 24 hour market

Foreign exchange market trading occurs over a 24 hour period picking up in Asia around 24:00 CET Sunday evening and coming to an end in the United States on Friday around 23:00 CET. Although ECNs (electronic communications networks) exist for stock markets and futures markets (like Globex) that supply after hours trading, liquidity is often low and prices offered can often be uncompetitive.


4. No Limit up / limit down

Futures markets contain certain constraints that limit the number and type of transactions a trader can make under certain price conditions. When the price of a certain currency rises or falls beyond a certain pre-determined daily level traders are restricted from initiating new positions and are limited only to liquidating existing positions if they so desire. This mechanism is meant to control daily price volatility but in effect since the futures currency market follows the spot market anyway, the following day the futures market may undergo what is called a 'gap' or in other words the futures price will re-adjust to the spot price the next day. In the OTC market no such trading constraints exist permitting the trader to truly implement his trading strategy to the fullest extent. Since a trader can protect his position from large unexpected price movements with stop-loss orders the high volatility in the spot market can be fully controlled.
5. Sell before you buy

Equity brokers offer very restrictive short-selling margin requirements to customers. This means that a customer does not possess the liquidity to be able to sell stock before he buys it. Margin wise, a trader has exactly the same capacity when initiating a selling or buying position in the spot market. In spot trading when you're selling one currency, you're necessarily buying another.

Forex Trading - Origin

In order to gain a complete understanding of what foreign exchange is, it is useful to examine the reasons that lead to its existence in the first place. Exhaustively detailing the historical events that shaped the foreign exchange market into what it is today is of no great importance to the forex trader and therefore we happily will omit lengthy explanations of historical events such as the Bretton Woods accord in favor of a more specific insight into the reasoning behind foreign exchange as a medium of exchange of goods and services.

Historically our ancestors conducted trading of goods against other goods this system of bartering was of course quite inefficient and required lengthy negotiation and searching to be able to strike a deal. Eventually forms of metal like bronze, silver and gold came to be used in standardized sizes and later grades (purity) to facilitate the exchange of merchandise. The basis for these mediums of exchange was acceptance by the general public and practical variables like durability and storage. Eventually during the late middle ages, a variety of paper IOU started gaining popularity as an exchange medium.

The obvious advantage of carrying around 'precious' paper versus carrying around bags of precious metal was slowly recognized through the ages. Eventually stable governments adopted paper currency and backed the value of the paper with gold reserves. This came to be known as the gold standard. The Bretton Woods accord in July 1944 fixed the dollar to 35 USD per ounce and other currencies to the dollar. In 1971, president Nixon suspended the convertibility to gold and let the US dollar 'float' against other currencies.

Since then the foreign exchange market has developed into the largest market in the world with a total daily turnover of about 1.5 trillion USD. Traditionally an institutional (inter-bank) market, the popularity of online currency trading offered to the private individual is democratising foreign exchange and widening the retail market.

What is FOREX (Foreign Exchange) ?

Foreign Exchange (FOREX) is the arena where a nation's currency is exchanged for that of another. The foreign exchange market is the largest financial market in the world, with the equivalent of over $1.9 trillion changing hands 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 and no central exchange (off-exchange). It operates through a global 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 in all the major financial centers.

Traditionally, retail 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. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets.