Knowledge centre | FX explained

Liquidity at your fingertips

If you think you can predict the price movements in different currencies, you should investigate Foreign Exchange trading.

What is it?

The global foreign exchange market is the largest market in the world, with more than $3 trillion daily turnover - dwarfing the combined turnover of the world's stock and bond markets. The liquidity and competitive pricing available in this market are unsurpassed, and today, with the irregularity in performance in other markets, the growth of foreign exchange trading, investment and management is accelerating.

Who trades?

Hundreds of thousands of individuals, businesses and investment funds actively trade FX. Online trading, free web-based research and analysis combined with low cost pricing have made the market more accessible.

Why trade?

More recently, private investors and individual traders have entered the market for global currency as they discover the advantages of:

Aggressive investors are attracted by the volatility of the foreign exchange market and the opportunity for substantial profits, particularly when using leverage. However, individuals also need to be aware of the risks of using leverage.

Potential Pitfalls of FX trading

We urge all clients new to FX trading to carefully consider setting up risk controls and trading rules before getting involved with FX. The psychological impact of taking leveraged positions can lead many investors to close out profitable trades early and run losing trades leading to an overall loss on their account value. Whilst trading FX can be a profitable tool, it is important to think carefully about the potential high risks involved if you choose to use some or all of the leverage available when trading FX.

FX Terminology

Margin Trading
Fixed/Base & Variable Currency
Stop-Loss Discipline
Protective Stop-Loss Controls

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Margin Trading

Foreign exchange trading is normally undertaken on the basis of margin trading. A relatively small collateral deposit is required in order to initiate much larger traded positions in the market. When trading the main currencies, Moneycorp Markets require a 1% deposit on account to start trading.
 
For example, in order to trade $100,000, an investor is required to have $1,000 as collateral in his or her account. As a result of such a margin deposit, the investor may obtain gearing up to 100 times. Margin trading clearly demands a disciplined approach and although possible, such high leverage is not generally recommended.

Clients can choose their own leverage level on their account. This means that your account can have a high level or low level of gearing to suit your investment strategy and risk tolerance.

Fixed/Base & Variable Currency

A trade requires two currencies. This is called a currency cross/pair. When entering a trade one currency will be bought (long) and one currency will be sold (short). The first currency of the cross is called the fixed/base currency and the second currency the variable currency. If you enter a long position on a pair, the fixed currency is bought and the variable currency is sold.

e.g. Trading GBPUSD, GBP (the first currency) is the fixed currency and USD is the variable currency. If we went long, we would initially buy GBP and sell USD in the hope that USD would lose in value against the GBP which we have bought.

To close a trade which you have previously opened, you open another trade which is the exact opposite of the first trade.

e.g To close our long GBPUSD position we opened previously, we now open a short position. In this trade we sell our GBP and buy back the USD that we sold initially.
The trade size always relates to the fixed currency and profit or loss on a trade is always calculated in the variable currency.

For example if you went long 100,000 GBPUSD you would be long 100,000 GBP and your profit and loss would be in USD. In the above example every pip (0.0001 movement) the pair moved we would make/lose $10.

Moneycorp Markets will automatically exchange profits/losses back into your base currency.

Stop-Loss Discipline

There are significant opportunities and risks involved for investors in the foreign exchange markets. This calls for strict stop-loss policies in positions that are moving against you.
Fortunately, there are no daily limits on foreign exchange trading and no restrictions on trading hours, other than the weekend. This means that there will nearly always be an opportunity to react to moves in the main currency markets. Equally, there is a lower risk of being caught without the possibility of closing out your positions.

Protective Stop-Loss Controls

For speculative trading, we would always recommend the placement of protective stop-losses. Using the Moneycorp Markets Trader platform, investors can easily place and change all orders, including up to three contingent trade orders for each trade while watching developments in the market in real time. This effectively means you are able to place a trade, which when executed, will automatically place a protective stop loss and profit target without you even being in front of the screen.

A good place to start is by registering and downloading the Moneycorp Markets Trader platform demo. The demo allows you to trade Forex on a fully-functional trading platform, on live Forex prices and from a risk-free simulated account that can be reset if you want to start again from scratch.