Forex glossary- Forex trader

What is FOREX and its history, main advantages of FOREX trading, margin trading and use of leverage, basic technologies and terminology of trading

1.    What is FOREX and its brief history?


2.    How to make money on FOREX: main advantages of modern trading


3.    Basic trading technologies


4.    Short dictionary of the trader

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  1. What is FOREX and its brief history?


Modern financial markets provide a wide range of instruments for investment and speculation, ranging from more familiar to most ordinary people shares, gold and oil, ending with all sorts of derivative financial instruments (for example, binary options, forwards, swaps, etc.) and the latest inventions of financial engineering - cryptocurrency.


Among the variety of financial markets and their respective assets, the international currency market (FOREX) is of the greatest interest to novice traders. It trades currencies (US dollars, euros, Japanese yen, British pound and many other more exotic currencies). FOREX today is the largest and most liquid type of financial market. Its average trading volume is estimated to range from 3 to 5 trillion. dollars (for comparison, the daily turnover of the global securities market is about $300 billion). Forex trading takes place 24 hours a day, 5 days a week.


Due to a large number of participants and their diversity (banks and Central Banks, importers and exporters, investors and speculators, exchanges and traders) exchange rates are constantly moving, giving opportunities for income, both through purchases and sales of a particular currency.  

A brief history of FOREX

The international currency market in its most general sense has a long history. It takes the beginning even thousands of years before our era when the first metal money appeared. Currency exchange operations in their current understanding began to develop in the Middle Ages. This was due to the development of international trade and navigation. The first currency traders are the Italian money changers, who earned money from exchanging currencies of different countries.


The market of currency exchange transactions changed with the development of interstate relations, acquiring more and more distinct outlines. The most significant changes in the development of the foreign exchange market were made in the twentieth century. Market acquisition of modern features began in the 70s of the 20th century, when the system of fixed exchange rates of one currency against another was abolished (August 15, 1971, US President Richard Nixon announced the decision to abolish the free convertibility of the dollar in gold, which prompted the final collapse of the Bretton Woods monetary system).


As a result of these changes, a new kind of activity was born – currency trade, which began to be carried out on the international currency market - FOREX.

How to get on the FOREX?

FOREX is an interbank market where transactions take place between the largest banks in the world, and the minimum volume of transactions starts from several million dollars. At the same time, the average daily exchange rate fluctuations do not exceed 1%, that is, to earn 1000$, you need to crank an operation with a minimum of 100,000$.


Nevertheless, today's earnings in the foreign exchange market are available to almost everyone. It does not matter which part of the globe you are in, no matter in which country you live and what your national currency is, no matter what your education or your degree, operations on FOREX are now available to almost everyone. This became possible due to the development of technologies (both information and financial) that led to the emergence of Internet trading (e-commerce, which gives access to different financial markets based on the use of Internet technology) and margin trading (speculative trading operations using money and/or goods provided to the trader on credit against the collateral of the agreed amount - margin).

Main advantages of FOREX

FOREX is ideal for novice traders for a variety of reasons. Starting from the highest liquidity (at any time you can buy or sell any currency), ending with relatively low volatility (for example, in the oil market, the size of fluctuations reaches 3-4% per day, which increases the risks of trading several times). In addition, FOREX is the most information-transparent, that is, such moments as insider trading and accordingly obscure movements practically do not harm currency trading. Another advantage of trading on FOREX is the lack of opportunities for individual participants to "move" the market (4 trillion turnover per day makes it virtually impossible for one or another participant in the market, even large to provoke strong price fluctuations). In addition, a wide variety of available instruments provides a sufficient number of trading signals – you can trade not only the main currency pairs such as EURUSD, USDCHF, GBPUSD, USDJPY, but also their different combinations (cross-rates), as well as exotic currencies, so hundreds of trading instruments are available.


Thus, if you decide to try yourself in financial market speculation, FOREX is one of the best places to start.

2.    How to make money on FOREX: main advantages of modern trading
 
Modern trading is interesting not only because it is available to everyone who has access to the Internet, but also because it gives the opportunity to invest and speculate with financial assets, even having at its disposal a relatively small amount of money. This was made possible through the use of margin trading (speculative trading operations involving the use of money and/or goods provided to the trader on credit against the agreed amount of money - margin) and leverage (the ratio between the amount of collateral and the borrowed capital).


Let's look at a typical example that shows how you can make money in the international currency market (FOREX).
We will analyze the situation when a relatively small amount of 10,000$ is available.

Pair EURUSD
For trading with the EURUSD pair, leverage of 1:400 is used. This means that having a basic deposit of 10,000$ to trade can be up to 4,000,000$.


For illustration, consider the rally in the EURUSD pair, which we observed in January 2018. The month started at 1.20. The available amount of funds on the account with the account of the shoulder allowed to open 27 standard lots for the purchase of the EURUSD pair.
January the pair finished at around 1.2450. That is, the profit was 450 points. Given that the cost of 1 point for a standard lot is $ 10, and we entered the volume of 27 lots, the financial result of this transaction was: 
Profit = 27 lots * 10$ per lot / item * 450 points = 121,500$.
As we can see, having only 10,000$ on the account and having made only one deal, which lasted exactly 1 month, we could earn 121 500$. This is equivalent to a yield of 1215% (!) per month or 14 580% (!) per year. No business in the world, even the arms and drug trade, will yield such profitability. Nevertheless, we considered the absolutely real situation that took place in the international currency market just a month ago.

Main advantages of modern trading

•    If you have an Internet connection, you can trade almost anywhere, having a laptop or any mobile device (for example, a smartphone).
•    This type of activity, when a trader reaches a certain professional level, can become an additional way of earning, or on its basis, you can organize your own business.
•    Internet trading significantly simplifies the procedure for making a deal - in most trading terminals, the transaction process is reduced to one click on a computer mouse, and the time it takes to enter or exit a trade transaction is reduced to several seconds.
•    You trade on equal terms with all market participants. None of the traders has any advantages in access to trading information or terms of transactions.
•    Convenience of settlement calculations. In addition to the procedure at the stage of opening an account, where certain documents are required, in the future, no documentation is required when withdrawing profits. All you need is a computer (laptop) and the Internet.
•    Monitor your trading positions and cash flows in real-time.
•    Continuous flow of real-time information, current quotes and news from leading specialized news agencies.
•    Ability to apply various trading strategies, from scalping to positional trading, the use of automated trading systems and the transfer of funds to the account manager in trust management.

3.    Basic trading technologies

We have already said that FOREX is an interbank market with huge volumes of trades. Obviously, market-makers of the level of Citibank or Deutsche Bank are absolutely not interested, and not profitable, to work with clients whose volumes are less than certain levels (as a rule, we are talking about tens and hundreds of millions of dollars). The question arises, how do ordinary mortals get access to operations in the foreign exchange market? 
But this is not the only problem that stands in the way of those wishing to make money on fluctuations in exchange rates.


For example, to make money on the growth of the dollar, you need to buy this very dollar first. That is, we are talking about the need for physical delivery of the asset. And if in the case of the dollar it's all the less simple, then if you want to speculate with something else, for example, oil (although this is not the currency market, but characterizes the problem analyzed most typically), it means that you will have to arrange delivery and Storage of barrels or even tanks with oil. And this is completely beyond the reality of the average citizen, who simply wants to make money on the difference in rates. 


But even these problems of the potential trader are not exhausted. The object of speculation is not only the purchase of the asset but also its sale if you predict a decline in the price of the asset in the foreseeable future. For example, you have 1000$ on the account, and you would like to sell the British pound because you think that because of Brexit, it is very vulnerable. There is a reasonable question, how can you sell something, if you do not have it?


This is not a complete list of problems that a potential trader is facing (it does not matter if he wants to trade on the currency, commodity, stock or any other financial market). It is important to understand that modern trading technologies allow them to be successfully solved and give the opportunity to earn on financial markets not only to millionaires but also to ordinary mere mortals.


Let's look at the key trading technologies that allow access to speculation in the foreign exchange market to practically everyone:


- contracts for the difference in prices;
- margin trading;
- leverage.

Margin trading
The basic technology that made modern trading possible, and provided its main advantages, is margin trading.
Margin trading is the conduct of speculative trading operations using money and/or goods provided to the trader on credit against a pledge of the agreed amount - margin.


The use of leverage for the implementation of transactions, which allows customers to make trading transactions with amounts significantly exceeding the number of funds on the trading account. 
Leverage


It is the use of the leverage (the ratio between the amount of the collateral and the borrowed capital allocated to it) that gives an opportunity in principle, even with insignificant capital, to earn the most insignificant fluctuations in exchange rates. As part of margin trading, most of the funds for trading are given to you by a company that provides access to trade. Moreover, these relationships (called leverage) can be very different from 1:5 (1 own dollar accounts for 5 dollars borrowed) to 1:100 or even 1:500. That is, with leverage of 1:100, investing 500$, you can trade for 50,000$ (4,900$ of which is interest-free credit used for trading). And there are fundamentally different opportunities for earning. Trading 500$ at a daily rate fluctuation of 1% will make it possible to earn about 5$ (500$ * 1%), but the amount of 50,000$ expands the earnings potential up to 500$ (50,000$ * 1%) per day. That is, it's about the fact that you can theoretically double your deposit every day. In this light, the stories of the Wall Street legends that made billions in the trade do not seem so fabulous anymore. Actually, George Soros created his fortune, reputation and status of the legend precisely thanks to the trade in the foreign exchange market. Only a deal with the British pound allowed him to earn about 1-1.5 billion $.


Instead of specifying the margin size, specify the size of the leverage in the form of a ratio that shows the ratio of the collateral amount to the size of the provided credit. 
For example, margin requirements of 20% correspond to the 1:5 (one to five) leverage, and margin requirements of 1% correspond to the 1:100 (one to one hundred) leverage. In this case, it is said that the trader receives for trading the funds in 5 (or 100) times more than the size of his security deposit. 


Sales without coverage


One of the advantages and features of margin trading is the use of technology "sale without coverage".   
Sale without coverage is an opportunity to sell the goods taken on credit with the supposed subsequent purchase of similar goods and repayment in kind (commodity) form. 
Thus, having only dollars on the account, you can sell the pounds, because they will give you on credit, which you then pay off when you make a reverse pound transaction, that is, its purchase.
This mechanism provides a technical opportunity to profit from falling prices.
Contract For Difference (CFD)
The problem of the need for physical delivery of the asset has solved the use of the so-called Contract For Difference.


Contract For Difference — is a contract between two parties — the seller and the buyer — to transfer the difference between the current value of the asset at the time of the contract/position opening and its value at the end of the contract/closing position. 


If the price of an asset has increased between the first and second transactions, the buyer will receive a price difference from the seller.


If the price has decreased - the seller will receive a price difference from the buyer.
Usually, the validity of such a contract is not established and it can be terminated at the request of only one party to whom such a right is granted.
Thus, you do not need to buy a barrel of oil. You buy it virtually with a commitment in time to sell. That is, in fact, in the real world, no movement of goods occurs.

4.    Short Dictionary of the trader

CFD (Contract For Difference) - is a contract between two parties — the seller and the buyer — to transfer the difference between the current value of the asset at the time of the contract/position opening and its value at the end of the contract/closing position.

Volatility - price fluctuation range of a financial instrument 

Consolidation - stabilization of prices after their increase or decrease.

Divergence (antonym convergence) – discrepancy. For example, the divergence of monetary policies of the Central Banks means that some rates are raised, while others are lowered.

Convergence (antonym divergence)  – descent.

Parity – equality

Gap - rupture on the price chart. The situation when the opening of a new candle is not equal to the closing of the previous one.

Market beaker - a queue of orders in the exchange terminal, where you can see the location of the nearest orders to the price.

The differential of interest rates is the difference in interest rates between two countries (Central Banks).

Lock (locked positions, stretch) - positions of the same volume, opened on the same account for the same instrument in a different direction (to buy and sell).
 
Leverage - the ratio between the amount of the collateral and the loan capital allocated for it. That is the leverage of 1 to 100 means that the trader receives 100 times more money for trading than the amount of his security deposit.

Lot - the amount of the base currency or securities participating in the transaction.

Margin - a deposit that a trader leaves to open a position.

Margin call – the broker's requirement for the client to add money. That is, this is a situation in which the trader's funds are not enough to cover all of his open positions. 

Margin trading - the conduct of speculative trading operations using money and/or goods provided to the trader on credit against a pledge of the agreed amount - margin.

Order - request from the client to perform a trading operation.

Pending order - request to open/close a trade when the price reaches a certain level.

Sale without coverage (short position or uncovered sale) - sale of the loaned goods with the alleged subsequent purchase of this product and the return of the goods taken on credit.

Slippage - execution of an order at a price that differs from the price that the trader specified in the order.
 
Item (pips) - minimum change in the value of a financial instrument.

Market order - order to open/close the trade, which is currently given at the actual price. 

 Swap - the difference in interest rates on loans in the currencies involved in the transaction. It is credited (if positive) to a trading account or debited from it (if negative) when an open trading position is transferred through the night.

Spot market or cash market - is a market where goods, stocks or other financial instruments, such as currencies, are bought for cash with immediate delivery (usually within two days).

Spread - the difference between the purchase price and the sale price.

Stop Loss - is a warrant (trade order), which allows the trader to avoid additional losses by automatically closing the position.

Take-profit - is an order (a trade order) that allows you to capture profits when the price reaches a certain level.

Margin level - is the ratio of the trader's funds and collateral (margin), which is expressed as a percentage. Figure – 100 points.

Forex (sometimes FX, from eng. FOReign EXchange) - interbank currency exchange market.