16 October 2008

Forex Trading Basics - Part I

So you want to go the Forex trading way? Well before you venture and tread along this adventurous path, there are few facts that you need to bear in mind. This will enable you make wise, informed decisions before you move forward and commit your hard earned cash. You will thus require to familiarise yourself with the technical jargon used by the financial markets so that you don't grope in the dark.

Foreign exchange is the simultaneous purchase of one currency and sale of another – currencies are always traded in pairs. International currencies are traded on floating exchange rates. There is a daily average turnover of about US$1.5 trillion in the foreign exchange markets. The foreign exchange market is known as the "Forex," or "FX" market. It is the largest financial market in the world.

Simply stated, each country has its own currency. Currency trading occurs when one country's currency is traded for another country's currency at the prevailing exchange rate. All currency trading is traded in LOTS. Each lot has a different amount of currency. For example; a Swiss Franc lot has 125,000 Swiss Francs in it. A trader does not buy lots in order to buy and sell it or trade it. A trader opens a margin account, enabling him the right to trade it.

A margin account is a bond account. It is like a savings account that insures against trading losses. Before you can trade, you need to place a certain amount of money in what is called a margin account. You are guaranteeing other traders that you can pay them if you lose. That account is overseen by your broker. He monitors your account when you trade. He usually will not allow you to risk more than what is in your margin account. The margin account exists so, as you win on a daily basis, they have a place to deposit your money. Conversely, when you lose, they have an account to withdraw the money.

Margin requirements in the FX marketplace allow you to hold positions much larger than the asset value of your account. Trading with Forex Capital Management includes a pre-trade check for margin availability, the trade is executed only if there are sufficient margin funds in your account. The Forex Capital Management trading system calculates cash on hand necessary to cover current positions, and provides this information to you in real time. If funds in your account fall below margin requirements, the system will close all open positions. This prevents your account from falling below your available equity, which is a key protection in this volatile, fast moving marketplace.