Forex Basics
Placing a trade in the forex market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless. Below is a step-by-step guide of what happens when a trade is placed.
Since forex stands for foreign exchange, the common understanding of forex trading is that currencies change hands at a profit/loss when their values fluctuate. In the traditional spot forex market, trades are settled on a value date 1 to 2 business days after the trade date, when the currencies bought and sold are physically exchanged. However, there is a variation to the mechanics of an online forex trade.
For example, when you buy EUR/USD in an MF Global FX Trading Account, you do not actually take physical possession of Euros and owe an equivalent amount of U.S. Dollars. In most online forex trading there is neither the option nor the obligation to make or take delivery of currencies, with very few exceptions. Instead, the platform calculates a floating profit/loss of the open position in real-time, which is also reflected in the change of the [Equity] in the [Accounts] window.
In this example of a long position in EUR/USD, you may view the transaction as the purchase of an index which is the over-the-counter derivative of an underlying exchange rate between the 2 currencies (EUR & USD) whose benchmark price is quoted on the interbank market. In fact, the only settlement that takes place in your account is the interest payment at rollover and when you close the open position, which crystallizes the floating (unrealized) profit/loss in your [Balance]. This is partly why forex contracts are regulated similar to “Contracts-For-Difference” or “CFDs” in some Canadian jurisdictions.
When you buy EUR/USD in your MF Global FX Trading Account, you create a long position in the currency pair which is displayed in the [Open Positions] window on the Trading Station. If EUR/USD appreciates beyond your entry price, an unrealized profit is generated on the position which is reflected in the [Equity], [Day P/L] and [Gross P/L] columns in the [Accounts] window. Conversely, if EUR/USD trades below your entry price, an unrealized loss will result.
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The price of a currency pair represents the value of the primary (base) currency expressed in the secondary (quote or counter) currency. If you believe the primary currency will depreciate against the secondary currency, you may sell the currency pair by clicking on the bid price. If you believe the primary currency will appreciate against the secondary currency, you may buy the currency pair by clicking on the ask price.
Calculation of Profit/Loss
Using the above quote, let us look at 2 trade examples, one buy and one sell of EUR/USD, each for EUR100,000:
You sell EUR/USD by clicking on the bid price of 1.47276. After the trade is opened, you have technically sold EUR100,000 and received USD147,276. If EUR/USD trades down to 1.4650 and you close your position, you execute a [Close] order which buys back EUR100,000 with only USD146,500. The difference of USD776 is the profit on the trade.
Conversely, you buy EUR/USD by clicking on the ask price of 1.47301. After the trade is opened, you have technically bought EUR100,000 with USD147,301. If EUR/USD trades up to 1.4800 and you close your position, you execute a [Close] order which liquidates EUR100,000 for USD148,000. The difference of USD699 is the profit on the trade.
The Costs of Trading
The bid price is where you can sell the currency pair. The ask price is where you can buy the currency pair. The difference between these two prices is the spread, or the cost of the trade. The typical spread in EUR/USD is 2.5 pips on the MF Global FX Trading Station. In a Mini account, a pip on the EUR/USD currency pair is worth $1. The spread defines the cost of the trade. Spreads are a part of all markets, but are typically "hidden" in the broker-based equities and futures markets. MF Global FX is compensated for its services through the bid/ask spread.
Leverage
Leverage is a tool that allows a trader to take a position larger than the value of the account. MF Global FX enables you to trade with competitive margins and sets the default leverage of your account to levels permitted by regulation. However, we do not recommend using leverage of more than 10 times your account value. MF Global FX reserves the right to set higher margin requirements based on account size, simultaneous open positions, trading style, market conditions, etc. If account equity falls below margin requirement, MF Global FX may close some or all open positions at prevailing market rates. Details
Rollover
For any position open at 5 PM EST, daily rollover (interest payment) will apply. You will either pay or earn on an open position depending on whether you are long or short the higher interest yielding currency in the pair. If you do not want to earn or pay interest on your positions, simply make sure they are closed at 5 PM EST, the established end of the trading day. Details
Trading in Volatile Markets
In the online forex industry, the trading platform used by MF Global FX is virtually unrivaled in reliability and technical efficiency. The platform has a proven, accomplished track record of stability even during the most turbulent market conditions. However, you should understand that volatile market conditions will affect liquidity, and therefore impact order execution. Market gaps may occur under these circumstances and although MF Global FX will strive to ensure that there is sufficient liquidity to fill orders, some liquidity providers may temporarily withdraw pricing from the market resulting in wider spreads and delays in order execution and trade confirmation. Examples of events causing volatile market conditions include, but are not limited to, the release of economic reports, rate announcements, or any breaking news of a political or economic nature.
The execution of all Market, Stop Loss, Limit and Entry orders are on a best-effort basis. Currency trading, whether on a regulated futures exchange such as the Chicago Mercantile Exchange (CME) or in the over-the-counter market, carries high risks, which can be exacerbated during volatile markets after certain announcements.
In addition, where the new information released is substantially variant from market consensus, it will prompt liquidity providers to re-price risk and adjust rates accordingly, which ultimately will impact order execution. Although MF Global FX will always endeavor to fill a Market order at the quoted price, under these circumstances, it is possible that you may not receive a fill at the requested price.
Order execution and trade confirmation are immediate under normal market conditions. Please review the relevant (Trading Station or MT4) Execution Risk Disclosure of the platform you select. All quotes and trades are subject to the terms and conditions of the Client Agreement accessible from this website.
