What is Forex ?
What is Forex ?
The Foreign Exchange Market is also known as the Forex Market or FX Market.It is a market where participants exchange one currency for another, facilitating the exchange of trillions of dollars of transactions every day. There is no central location or exchange, rather money is transacted through a network of international dealers and brokers.
Businesses use the Forex Market when, say, a company buys a product from abroad.Take for example when a UK company sells a car to a USAcompany. The car is shipped to the USA and the American company may have to pay the UK company in £ pounds. The US company has to convert US Dollars(USD) to Pounds (GBP) and it is at this point that the US company will use the Forex market to make this transfer from dollars to pounds at the current exchange rate.
Speculators also use the Forex Market, buying currencies that they think will increase in value and selling currencies that they think will decrease in value. One currency valuation will be relative to another currency; that is the reason why a price is given in relation to another currency, or what is called an 'exchange rate', simply, the rate at which one currency can be exchanged for another.
There are many factors that contribute to a move in an exchange rate, including interest rates, political situations, imports and export and monetary policy.
The Forex market is by all accounts the largest financial market in the world with volumes of over $3 trillion dollars being traded on a daily basis.
What are you trading at Hirose Financial?
When you trade Forex with us you are literally trading Money, not in a physical sense though, because you will never physically exchange one currency for another during a transaction. Rather, you will be buying and selling currencies with what we call a CFD. A CFD is a 'contract for difference', which acts like the real thing but saves you all the hassle of a physical exchange of money.
This CFD can also be called a Spot Foreign Exchange Margined Trade. Spot means that you are trading a cash price (not a future, option or other type of derivative); margined means that the deposit you put down to trade with is less than the amount you are actually trading (we will go into further detail later).
Generally the exchange rate of two currencies is a reflection of the economic condition of both countries. When you (perhaps as a speculator) are buying British Pounds and selling US Dollars you are in effect expecting that the UK is going to perform better than the USA. This trade may take place over a couple of seconds or minutes or may be played out over days or months.
Convention dictates that currency symbols are made up of three letters where the first two letters identify the country and the third letter identifies the name of that country's currency.
Why trade Forex?
The Forex market continues to flourish in popularity on a global basis. Many traders are spurning traditional equity and futures markets to trade FX instead. Why?
Barriers to Entry
Basically, there are none. It costs nothing to open an Account; the deposit requirement is minimal (to trade 1 lot (or 1000 units) you are required to deposit a small percentage of the total value in your Account; Hirose Financial offers leverage up to 1:400 which means that with £10you can buy £4000 worth of currency; Our platforms have a huge amount of functionality including a free charting package and many other useful tools, so there is nothing extra to buy; literally, anyone who has the desire to trade FX can get started immediately, especially if you have a limited amount of capital to trade with.
The market cannot be cornered
Because the market is so huge and there are so many participants involved it is virtually impossible for one single entity to control a free market price for any length of time. Central banks can of course try (remember Black Wednesday 1992) with varying degrees of success.
Open 24hrs a day
Forex is a 24/5 market that does not sleep. At any point in time, day or night, there is potential to trade. One significant advantage is that traders can determine the times that they trade, even if they are holding down a full time job.
The Spread/Transaction cost
This is the cost of trading. Hirose adds a fraction to the bid and offer to produce a net price that you see on the platform. There are no other broker fees, no exchange fees, no clearing fees and no government fees. It's all in the Spread.A smaller spread reduces your cost of trading. Note: there are financing costs (that you either receive or pay) if you hold a position past 5.00pm EST.
Hirose Financial offers Micro Lotsand you can determine how much you want trade, with a minimum 1 lot equal to 1000 units of the base currency. For example, if you trade 1 lot of GBPUSD you are trading £1000 of the dollar equivalent.
The Forex market is the largest market in the world with over $4 trillion being transacted every day. The result is that with one click of your mouse you can make a transaction instantaneously as there will always be someone willing to take the other side of your trade.
The good news is that you don't have to jump in and trade a real account immediately. We have a free demo account that allows you to get to know the market and our services.You can build your skills and confidence before opening a live account and risking real money.
When you open a position you only need to deposit a fraction of what the value of your trade is worth. It allows you to make significant profits (but remember you can also make large losses as well). Leverage, when managed properly can be a very powerful tool for trading. Hirose Financial offers leverage up to 1:300.
What does this mean?
1:1 leverage means that if you have £100 you can buy £100 worth of currency.
1:30 leverage means that your £100 can now buy £3000 worth of currency.
1:300 leverage means that your £100 can now buy £30000 worth of currency.
How your trade works
Unlike the Stock Market or a Futures Market Exchange, there is no single price on a centralised exchange. In fact there are multiple dealers, from banks to hedge funds, that are all quoting different prices at any point in time. Because the market is so large and all these dealers are competing against each other, you should get the price that you ask for most of the time.
Who provides liquidity to the platform?
The major banks are some of the largest liquidity providers in the FX market. Deutsche Bank, UBS, Barclays Capital and Citigroup are part of what we call the 'interbank' market which is effectively the foreign exchange market. Then there are other financial institutions, hedge funds and other asset managers that make up a diverse array of liquidity.
Hirose Financial has many liquidity providers; all the prices that we get are fed into an aggregator which ensures that the best prices will always be shown on ourLIONMT4 platform.
Our Liquidity providers are constantly competing to offer the best price.
Our aggregator determines the best available price for you: this is shown as the bid and ask price on your platform that includes any mark-up from us. There are no other fees or commissions that make up the bid / offer spread.
1. We show a bid / ask spread (including any mark-up)
2. You send us an order
3. We execute your order at the best available price
Hirose UK does not use a dealing desk; that means that your orders get executed immediately. It is completely transparent and fair to everyone.
Trade size and Micro Lots
The size of a trade is executed on a 'per lot' basis.
The standard lot sizein the Forex industry is 1 lot =100,000 of the base currency.
With our innovative Micro Forex account 1 lot =1000of the base currency. That means that you can trade in much smaller increments than the standard lot size and therefore manage your risk more effectively.
Example of lot size
For example, let's say you want to buy USD/CAD as you believe the US dollar will strengthen or 'appreciate' against the Canadian dollar. You want to trade $10,000 therefore you buy 10 lots (10 x 1000) of USD/CAD at an indicative price of 1.0300.
What does this mean?
You have simultaneously bought $10,000 US dollars and sold 10,300 Canadian dollars (remember, for every currency you buy you are selling another currency).
Your profit and loss is shown in the second or 'quote' or 'counter' currency (Canadian Dollars in the above example). Hirose's LIONMT4 platform also shows your P&L in the Base Currency.
How to calculate the value of a pip move
'Pip' means 'price interest point' and is a reference to the smallest incremental price move of a currency.
The formula for a Pip = lot size x tick size
Example for 1 lot (or 1000 units) of GBP/USD:
1 pip =1,000 (lot size) x .0001 (tick size) = $0.1 USD
Calculating P&L and Indirect Rate P&L
Once you can calculate the value of a Pip you can calculate your P&L. When you apply for an account at Hirose Financial you will determine the Base currency you want to trade in. All trades ultimately get converted into your Base currency as can be seen on the LIONMT 4 Platform. However it is important to know how your P&L is derived. An indirect rate (where the US Dollar is the Base currency) P&L and conversion into USD are shown below.
Example of P&L
Using the example earlier, you buy 10 lots (10 x 1000) of USD/CAD at an indicative price of 1.03000. The price then rallies as good news about the USA economy comes out. At 1.03300 you sell the whole position.
1.03300 (sell price) - 1.03000 (buy price) = +.00300 (or 300) positive pip difference
1 pip =10,000 (lot size) x 0.00001 (tick size) =0.1 CAD
Therefore: 1 (pip value) x 300 (pip gain) = CAD $30
In USD $ terms the calculation would be:
Pip formula = (lot size x tick size) / current rate
1 pip = 10,000 (lot size) x 0.00001 (tick size) / 1.03300 (current rate) = .09680
Therefore: USD $.09680 (pip value) x 300 (pip gain) = USD$ 29.04
A Cross Rate is a rate between two currencies that are not the official currencies of the country that the quote is given in. The term is also used to refer to currencies that do not include the US Dollar.
For example, if you trade the EUR/GBP this can be considered a Cross Rate. You will need to utilise the base quote e.g. EURUSD to convert back into USD.
Example of calculating Cross Rate P&L
You sell 50 lots of EUR/GBP at .80200 and then buy 50 lots to close at .80300. EURUSD (base quote) = 1.25620
.80200 (sell price) - .80300 (buy price) = - .00100 negative pip difference
1 pip = 5,000 (lot size) x 0.00001 (tick size) = 0.05 GBP
Therefore: 0.05 (pip value) x -100 (pip loss) = -5 GBP
To further convert the cross rate P/L to USD:
Pip formula is: (lot size x tick size x base quote) / current rate
1 pip =( (5000 (lot size) x 0.00001 (tick size) x 1.25620 (base quote) ) / .80300 (current rate) = USD $.078
Therefore: USD .078 (pip value) x -100 (pip loss) = USD $-7.80 loss
Forex market convention dictates that when trading Spot FX your position will be settled in two (2) days time. This is known as Tom Next (Tomorrow Next Day) settlement which reflected the historical time period that it took for counterparties to a trade to confirm their payment details to the other party.
Margined Spot FX trading mirrors the underlying (physical) method except that you will never have to physically settle a position; rather, the position continues to roll over each night at 5.00pm EST until you decide to close it.
If you still have a position at 5.00pm EST you will be liable for financing of that position, effectively calculated for 2 days in advance from today, known as the Value Date. So, on a Monday the value date is Wednesday; on Tuesday the Value Date is Thursday etc.
The Wednesday rollover also incorporates the weekend (so 3 days financing in total) which explains why you may see a fractionally higher financing cost/benefit in your trade report.
The financing rates are calculated using the interest rates of the two currencies that you have traded. The general rule is that you will receive interest on the currency you are long and pay interest on the currency that you are short. The table below summarises when you may pay and receive rollover financing.
Rollover Financing example for LION MT4
You buy 1 lot (100,000 units) of EURUSD at 1.29000
You are buying EUR (the first currency pair) and therefore will be receiving Euro interest.
You are selling USD (the counter currency) and therefore will be paying US Dollar interest.
Hirose will publish Rollover Financing figures daily (see Rollover Financing LION MT4 for more details)
Assume Financing is:
Short EURUSD: -0.3
Long EURUSD: -0.4
Nb of Lots: 1
Nb of Days: 2
Rollover financing = 1 (Nb of Lots) X -0.4 (Swap Rate) X 2 (Nb of Days) = -0.8USD
The Rollover financing amount will then be converted into your base currency using the midpoint of close of day prices.
Rollover Financing example for LION Trader (ActTrader)
You sell 100 lots of GBPUSD at 1.56700
You are selling GBP (the first currency pair) and therefore will be paying Sterling interest.
You are buying USD (the counter currency) and therefore will be receiving US Dollar interest.
Hirose will publish Rollover Financing figures daily (see Rollover Financing LION Trader for more details)
Assume Financing is:
Roll Sell: -0.01021
Roll Buy: 0.00255
Nb of Days: 1
Rollover financing = 100 (lots) x -0.01021 (Roll Sell) x 1 (Nb of Days) = -£1.021
If the position was maintained past 5PM (EST) on a Wednesday then 3 days of financing would be incorporated to take into account the weekend. This may also apply to Bank Holidays.