Risk and Benefit

August 22, 2017

The foreign exchange market has become so vast and wealthy in a short period of time through a number of factors including market size and volatility.

When considering the risks and benefits of engaging trade in forex, and investor/broker should consider  the highly liquid nature of this market. Investors operating in forex have the option of placing extremely large trades without affecting any given exchange rates due to the low margin requirements used by the majority of the industry’s brokers.

What does that mean? Essentially, leverage can be negotiable. It’s entirely possible for a trader to control a postion of $100,00 in U.S. dollar by putting down the relatively miniscule down payment of $1,000 and borrowing the rest from their broker, which would be comparable to renting a $500 suit for a gala event and only putting down $50 for the shoes and borrowing the rest from your roommate.

Care needs to be taken with this kind of leverage, however. Although investors can realize large gains when rates make a small favorable change, they also run the risk of a massive loss when the rates move against them. But those risks, coupled with the possibility of massive gains, stands as both the biggest appeal about the forex market and the primary reason for its continued success.

Forex’s hours of operation don’t hurt, either. Because of its 24-hour business period during the work week, the market experiences a state of near-constant decent liquidity. This makes forex an very attractive market for investors who have other obligations during the work week, such as days jobs, classes, or family commitments. Lacking the opening and closing bells of Wall Street, forex boasts a more flexible trading period that encompass larger and more varied markets.

But again, investors need to consider the risks inherent with the possible gains. Because the markets is wide and diverse, traders have to react quickly to information released into the market, which can create a trading atmosphere that can stop on a dime and do a 180-degree turn at whiplash speed. Gains can become losses at the drop of a hat and vice versa, which should give a new trader pause before diving into the market.

A big reason for that pace goes back to the leverage that can be influenced upon the market. Consider the example of purchasing $100,000 at the cost of $1,000, or a 100:1 leverage ration. If an investor puts the entirety of the $100,000 into one currency set and the currency’s price moves even one percent against the buyer, the value of the capital will subsequently decrease by $99,000. This would constitute a loss of $1,000, which was how much the investor actually purchased, thus creating a 100 percent loss for the investor.

However, that same volatility could work in the investor’s favor if the currency price were to go in the other direction. That uncertainty, coupled with the inherent volatility of forex, create a market filled with possibilities for the savvy investor.

Reading a Forex Quote

August 22, 2017

So now that we have some basic understanding about forex, a potential investor might be considering doing business on the market. If that’s the case, it may help to be able to understand a forex quote.

Because forex deals with the exchange of two different types of currency, the quote price has to reflect the values of both currencies. To do this, one had to understand how to read a currency pair.

Quoting one currency on forex always gets done in relation to another currency form, like U.S. dollars to euros or Japanese yen to Indian rupees. Showing a pair allows the value of one currency form to be reflected through the other in a manner similar to comparing an apple to an orange on a table; they’re both pieces of fruit, but their differences can be seen clearly.

The forex quote for two currencies will look like this:

USD/JPY = 106.24

For this example, the forex currency pair is comparing the U.S. dollar to the Japanese yen.

Starting from the left, the currency listed before the slash mark is called the base currency, which always equals one unit. The currency after the slash is the quote currency, or the counter currency. This currency amount shows the current equivalent of the quote currency in comparison of the base currency. For this example, the currency pair states that one U.S. dollar (the one unit) is the equivalent of 106.24 in Japanese yen.

Seeing the paired currencies listed like this allows the broker/investor to understand the exchange rate between any two sets of currencies at a given time. Because the market continually changes, it becomes necessary to constantly compare and contrast the various currencies to understand the changing dynamics. This state of constant movement not only grants forex a constant state of change when the market is open, but also helps forex grow to sizeable levels.

Forex also encourages a broker/investor to make purchases in a variety of combinations. If the yen market is high, a broker might decide to buy yen using a currency that rates lower for maximum gain. And because the market constantly fluctuates, the broker has the option to get creative on how they want to buy and sell based on where a given currency rates in comparison to others at a given time. Using the dollar/yen example, that quoted price could change within the hour or, more dramatically, be completely reversed based on market variables. And because the forex market is so vast, those changes can be happening on an almost minute-by-minute basis.

While the possibilities do entice the imagination, the broker should keep in mind that any posiiion taken on a trade will always be based to the terms of the base currency. If the broker buys a pair, the purchase will be made at the base currency, and the same rule will apply to sales. Think of the paired currency quote in terms of buy/sell definitions: the broker will be buying the base currency and selling at the quote currency.

Opening A Forex Brokerage Account

August 22, 2017

After a potential investor has decided to open a forex account and trade on the worldwide market, certain steps have to be taken to participate in forex.

Things to Consider

There are many factors to consider when engaging in forex trading: the amount of leverage a trader can influence during trades, the volatility of the forext markets, and the type of pacing favored by the individual trader.

The amount of leverage on an account will differ, although the standard factor seems to be 50:1. This means that for every $1 a trader has in their account allows them to control up to $50 in trading.  Leverage serves as a major benefit of forex trading, as it allows traders to make large gains with a small investment. It needs to be noted, however, that the same risk level that allows the leverage to potentially yield large gains can also create great losses depending on the volatility of the market. Given the circumstances, a trader could lose even more than they’ve invested if market conditions do not remain favorable.

Something that will be favorable, however, is the lack of commissions to trade in forex accounts is that trading within them is done on a commission-free basis. Unlike equity accounts, where a trader has topay the broker a fee for each trade, forex markets allow traders the option of dealing directly with market makers, essentially cutting out the middle man. Potential traders should also recognize that each brokerage firm has different spreads on foreign currency pairs traded through them. Each company will offer different levels of services and programs along with fees above and beyond actual trading costs. Also, due to the less regulated nature of the forex market, it is important to go with a reputable company.

Pick an account

There are two choices here: a personal account or a business (corporate) account. Remember to read the fine print regardless of which account you choose; get into the habit of doing this early.

A trader will have to decide which broker to use. Many firms offer demo accounts that will allow potential traders to find out what working with a given firm will be like. Traders will also be able to consider the option of using a managed account, which would allow a broker to trade for the individual. This may require a larger deposit to start and the broker will take a cut out of any profits earned during the course of trading.

Once a trader decides on a broker, the process enters familiar paperwork territory as they will have to fill out an application that includes some financial questions such as net worth and trade experience. Pay attention to the risk disclosures; forex moves at a fast pace and can be intimidating and financially difficult for beginners.

Forex vs. Everyone Else

August 22, 2017

Investors have options. Between the ever-growing number of trading instruments from blue chips, industrials, and futures, trying to decide where to trade can be an overwhelming decision to new investors.

Forex’s fast pace and inherent market volatility make for an attractive consideration, particularly for speculators and investors capable of adapting to an ever-changing trade environment. Investors looking for a more solid buy-and-hold approach may prefer the stock market.

Some areas to consider in comparison to forex trading:

Blue Chips

Blue chips are stocks from well-established and financially sound companies. These stocks enjoy the reputation of being able to operate/maintain profitability even during harsher economic times. Less volatile than forex by nature, they can be used to see steady growth potential.

Stability seems to be the name of the game with blue chip investments, which mean they lack the excitement and pacing offered by the more diverse forex markets. Investors tend to enjoy a 2:1 leverage access, which is understandable given the general solidity offered by blue chip investments. Trading hours generally hold at 9:30 a.m. to 4 p.m. EST, Monday through Friday, so anyone looking to engage in after-hours trading may not find blue chips flexible enough for their needs.


Indexes are a combination of similar stocks which can be used as a benchmark for a particular portfolio or the broad market. Think Dow Jones or Nasdaq in the United States. These indexes provide traders with an ability to gauge the movement of the overall market. Index investors enjoy access to broad market exposure and tools such index futures and e-mini index futures.

Compared to blue chip investments, indexes have a higher level of inherent volatility in their market places. Short-term investors tend to favor this, although the average daily traded value doesn’t hold a candle to what forex markets offer. Large leverage amounts can also be employed in the indexes, and like forex, index traders can trade in large position sizes with only small investment amounts, although the dangers of the changing market can make or break an investor using that technique. Trade exists almost around the clock, although that volume also pales compared to forex markets.

So, Where Should I Trade?

Thanks to the internet, potential investors have much greater trading options then were available even ten years ago. With all the possibilities, investors need to start their trading after understanding what they want to accomplish. If slow-and-steady is the preferred pace, blue chips or a similar investment options might be best. Lighting-quick investors may find the pacing of indexes and forex more attractive, but the fast pace could be problematic. Consider the hours open for trading, the types of investments that seem the most attractive, and decide also what the end result of the trading will be.

Direct Currency Quote vs. Indirect Currency Quote

August 22, 2017

With the understanding of base/quote currencies as quoted on forex, the potential investor should not consider how to quote a currency pair. This can be done either through direct or indirect quotes.

A direct currency quote refers to any currency pair where the domestic currency serves as the quoted currency. If, for example, one were to consider the American dollar as domestic and the Canadian currency as foreign, a direct quote would be CAD/USD. The direct quote will vary the domestic currency and the base will remain fixed as one unit.

Indirect currency quotes qualify as currency pairs where the domestic currency is the base currency. Using the same model as above, an indirect quote would be reversed, or USD/CAD. Using this quote shows the foreign currency as the variable and the domestic currency as the one-unit fixed model.

Most currencies in the forex market get traded against the U.S. dollar, which means the dollar typically ends up as the base currency in the currency pair. There are some exceptions to this rule, however, particularly in regard to currencies with historical ties to Britain, including the British pound, Australian dollar, and the New Zealand dollar. These currencies all get quoted as the base currency against the U.S. dollar, making the U.S. dollar the counter currency

Some notes on these currencies:

U.S. Dollar

The most actively traded currency in the world. Typically used as the base currency in paired currency comparisons.

British Pound

Replaces the U.S. dollar as the base whenever quoted against other currencies. The pound enjoys this status due to its longevity as the former dominant currency in the worlds prior to the ascendancy of the U.S. dollar. It helps to think of it as the retired legend in the field that people still bow to in the hallway.


Although not introduced to the world until 1999, the euro ended replacing many European currencies including marks, francs, and guilders. The creators of the euro intended the currency to be the financial market’s dominant currency. For this reason, it specified that the euro should always be the base currency whenever it is traded, even against both the U.S. dollar and the British pound.