Foreign Exchange Market (Forex) – the interbank foreign exchange market on which the purchase or sale of any currency. In most cases, forex trading carries a speculative nature and is carried out through commercial banks or dealing centers. It should be noted that the OTC market is not regulated.
futures market – a stock exchange regulated market on which the traded futures contracts (futures contract – a contract under which agree only on the level of prices and delivery dates, all other conditions are set in advance in the contract specifications). There are some types of futures: foreign exchange, commodities, financial futures and stock indices. A distinctive feature of the futures market on the Forex market is that it is a regulated market, formation is centralized on an exchange, (a single price for all), clearing of transactions also occurs only on the exchange. The largest futures exchanges are the CBOT, CME, NYMEX, ICE.
Today, the most common trade settlement (non-deliverable) futures when Mezhuyev parties occur only cash payments without physical delivery of the goods.
Quote – the price of goods on which the seller and the buyer is ready to make a deal. In the currency market, there are such things as the base currency and the quote currency when determining the quotes. The base currency is the currency it is, the price of which is expressed in a different currency, the so-called quoted.
EUR / USD = 1,4000. It means that for 1 euro (base currency) give 1.4000 dollar (quoted currency).
GBP / JPY = 134.00 means that over 1 British pound (base currency) give 134 Japanese yen (the quote currency).
Also, there is the concept of direct and indirect quote, and cross-rate. In the Forex market, direct quotes are those in which the quote currency is the US dollar. If the dollar is the base currency – a reverse quote. Cross-rate – a ratio between the two currencies, arising from their relationship to the dollar.
EUR / USD, GBP / USD – direct quotes,
USD / CAD, USD / CHF – reverse quotes
GBP / AUD, CAD / CHF – cross rates.
Lot – a fixed amount of the transaction. The smallest amount of currency that the bank can put up for sale – is 1 lot. On the Forex market 1 lot is always 100,000 units of base currency. Today, most banks and dealing centers offer the opportunity to trade fractional lots to 0.01, ie, buy and sell up to one-hundredth of the lot.
If you buy 1 lot EUR / USD, you buy 100 000 EUR.
If you bought a 0.1 lot EUR / USD, then you buy 10,000 euros.
If you bought a lot of 0.01 EUR / USD, you buy EUR 1 000.
With regard to trade in futures contracts, the minimum amount of the transaction may be only 1 lot, no less. The number of units of the underlying asset of the futures contract depends on the type and futures exchanges where it is listed.
If you buy 1 lot M6E (mini futures on the euro), the buy 125,000 euros.
If you buy 1 lot M6B (mini futures on the pound sterling), then you buy 62,500 pounds.
Leverage and margin deposit.
Previously trading in foreign exchange market demanded millions of investment and was only available to large investors, with the advent of dealing centers, broker companies and widespread Internet trading, you can start trading with minimum investments. For the opening of the transaction is enough to have 1-5% of the amount of currency to be purchased – this is the margin trading. Thus, dealing center or the bank lends you to the missing amount of money, in other words, gives you leverage. In most cases, the leverage is 1: 100, but many brokers can provide a leverage of 1 to 200 or 1 to 500. When the opening of the transaction, will be blocked by the amount of money in your trading account (collateral margin) required to secure your position. The collateral margin is calculated as follows: Contract size is multiplied by the volume (Lot), multiplied by the percentage margin and the price at the time of opening of the transaction.
Consider a few examples:
You buy 1 lot on the pair EURUSD, the price 1.3600, a leverage of 1: 100 (ie a margin of 1%). Thus mortgage funds will be equal to 100 000 * 1 * 0.01 * 1.3600 = USD 1 360, ie this amount will be taken to your trading account as collateral.
If you opened this transaction with leverage of 1: 500 (0.2% margin), the security deposit would amount to 272 USD (100 000 * 1 * 0.002 * 1.3600).
You buy 0.5 lot for a pair of GBPUSD (1.6500 price) and sell 2 lots on a pair GBPAUD (price 1,5200), a leverage of 1: 200 (0.5% margin).
For the first deposit of the transaction: 100 000 * 0,5 * 0,005 * 1,6500 = 412,5 USD.
For the second transaction deposit of 100 000 * 2 * 0.005 * 1.5200 = 1520 AUD (let’s say at the opening price of the transaction was AUDUSD 1.0700), 1520 * 1,0700 = 1626,40 USD.
Thus, as a result of 2 open trades deposit of 412,5 +1626,40 = 2038,90 USD.
Note that if you leave an open position for the next day, for the provision of the shoulder, you will be counted swap, the positive or negative, depending on the type of transaction and the currency pair.
When trading futures there is initial margin and maintenance margin.
Starting marzha- is the amount of money needed to open a position on a particular contract.
Maintenance margin – the level of funds below which a merchant account may not fall under open positions.
The initial collateral and margin are not dependent on the price of the instrument, as prescribed in its specifications according to the requirements of the exchange.
If the initial margin on the ES futures on the index Mini S & P 500 is 5625 dollars, and the maintenance margin – $ 4,500, for the purchase of 2 Lot require 11,250 lot, but if the opening price of the deal goes your way and means falls below the maintenance margin 9000 ( 4500 * 2) dollars, you will need to fill up a merchant account or to close 1 lot, in extreme cases, the broker has the right to close your position.
To date, most futures brokers on the opening take only intraday margin, which at times is less than the initial one. But if you leave the position to the next day, you have to have sufficient funds to provide initial margin or close the transaction before the closing and re-opening after opening.
Spread. Bid and Ask.
In the market there is always two prices: the purchase price (ask) and selling price (bid). The difference between the buying and selling is called the spread. All POS terminals and electronic systems, the bid price is always the first, then comes the price ask.
For example: EURUSD 1,4542 / 1,4544: Sale takes place at the price bid, and buy at the ask price.
It should also be noted that the graph is formed by price bid.
When trading in the Forex market value of the spread depends on the trading instrument and established broker. It should be noted that the broker can change the spread, depending on the liquidity and volatility of the market. As a rule, the expansion of the spread occurs when important economic news release. Also, the expansion of the spread depends on the type of transaction execution broker. There is a Market execution (market execution) when the spread can widen to almost any value and your order can be filled at a price different from that stated. When Instant execution (instant execution) the performance takes place only at the declared price and the spread may not exceed the level specified in the broker specification. In most cases, the broker does not take commissions for transactions as a broker profit is included in the rate of spread.
When trading futures contracts, the broker takes a commission only, and the spread of emerging markets and, as a rule, no more than 1 point.
Since the Forex market – is an electronic OTC trading system, the trading takes place 24 hours a day 5 days a week and is closed on the weekends.
With regard to the futures market, the trade contracts carried virtually around the clock on weekdays, except for small breaks and holidays when the exchange closed. Time trading futures contracts can be found in the specification of a broker or online exchanges where they are listed.
At time intervals, the trading process is divided into several sessions:
-Asian (Tokyo, Hong Kong, Singapore): from 0.00 to 10.00 GMT;
– Europe (Frankfurt, Zurich, London): from 7.00 to 17.00 GMT;
– The American session (New York, Chicago): from 13.00 to 21.00 GMT;
– Oceania (Wellington, Sydney): from 21.00 to 05.00 on the GMT;
It should be noted that the most volatility and active session is American.