Open 24 hours a day five days a week, the foreign exchange market is the largest and most liquid market in the world with volumes of over $4 trillion a day, surpassing any exchange based market. Foreign exchange trading involves trading one currency pair against another, with the predictions that one currency will rise or fall against another. Currencies are traded in pairs, like the Euro versus the US Dollar (EUR/USD).
How Does Forex Trading Work?
Forex trading is similar to trading shares or futures except that when trading foreign exchange, you are buying or selling one currency against another and you do not take delivery of the underlying currency. One of the key advantage that Forex has over other financial instruments is that, relatively small lot sizes can be traded. Lot sizes can be as small as 1000 units or one micro lot. Typically, foreign exchange also involves leverage which in some cases can be as high as 1:500. This is very different to trading shares where no leverage is involved. Leverage allows traders to trade with more money than the actual amount they have in their trading account. For example, if you had 1:100 leverage you could use a $1,000 deposit to control $100,000 worth of currency. Using leverage can result in an increased profit. However, it can also result in increased losses if it wasn't used properly.
KP International Group Australia PTY LTD offers Forex traders some of the tightest spreads out of all Forex exchange brokers out there with our EUR/USD spread averaging 0.1 pips. Tight spreads combined with our low latency enterprise grade hardware makes KP International the ideal choice for active day traders and for those using Expert Advisors. The following table shows our minimum and average spreads across all of the major currency pairs.
|Currency Pair||Minimum Spread (pips)||Average Spread (pips)|
Forex Trading Example
Opening the Position
The price of the EURO against the US Dollar (EUR/USD) is 1.33623/1.33624, you decide to sell 2 standard lots (the equivalent of €200,000) at 1.33623.
The value of your position is €200,000 x 1.33623 = USD $267,246. The leverage on your trading account is 1:100 therefore the margin required to open the position is USD $267,246 / 100 = USD $2,672.46.
Closing the Position
One week later the EURO has fallen against the US Dollar to 1.32128/1.32129, you decided to take your profit by buying back 2 standard lots at 1.32129.
The gross profit on your trade is calculated as the following:
|Opening Price||€200,000 x 1.33623 = USD $267,246|
|Closing Price||€200,000 x 1.32129 = USD $264,259|
|Gross Profit on Trade||USD $ 2,988|
It is important to note that whilst your position remains open, each night your account will be debited or credited for the swap rate. The swap is expressed in pips and is the difference between the interest paid to borrow the currency that is being sold and the interest received from holding the currency that is bought.
In order to calculate the net profit on this trade, your will need to include any swap and commission charges that are payable. You should be aware that if the market had moved in the opposite direction, you would have made a loss that could exceed your initial deposit.
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