Forex Glossary explains many technical terms used commonly by brokers and traders.
The market 'Bid' is the price available to sell the base currency (first named currency) against the terms currency (second named currency). In turn, the market 'Ask' is the price to buy the base against the terms currency.
For example, using the currency pair EUR/USD, the bid price might be 1.10231 and the ask 1.10236. This means that when buying the currency pair you would pay the Ask price of $1.10231 per euro. When selling you would receive the Bid price of $1.10236 per euro.
A bear is a person who believes that prices will fall.
A bear market is when prices are generally falling, or in a pronounced downtrend.
A bull is a person who believes that prices will rise.
A bull market describes a situation where prices in the market are generally rising, or in a pronounced uptrend.
The central objective of the carry trade is to borrow a currency at rock-bottom interest rates and use it to buy a currency with a higher interest rate (yield). In theory, as long as exchange rates stay the same, the interest rate differential will create profit. In practice, interest rate differentials may be narrower than the respective cash rates attached to the currencies in question, which may diminish the appeal of making a trade for carry purposes.
For example, if you borrowed Japanese Yen at an interest rate of 0.05%, and use them to buy Australian dollars (AUD/JPY) at an interest rate of 3%. You stand to make a profit of 2.95%.
While this strategy may appear as a method of creating 'riskless' profit, it also carries exchange rate exposure where unfavourable moves in the respective currencies may negate interest related profit. The carry trade has had limited appeal since the financial crises as many central banks are operating at record low base rates, making interest rate differentials much smaller and therefore less profitable.
Currency pairs are written in the form EUR/USD where the EURO is the base currency - the currency you are trading - and the US dollar is the terms currency - the currency against which the base currency is valued. In this pair, if US dollar is valued at 1.11000 EUR you would receive €0.9009 for every US$1.
Most currencies are 'floating' which means a currency pair will move in accordance with supply and demand.
The actual price a trader receives after executing an instruction to buy or sell. If a trader is 'filled', he or she has been given a confirmation of the requested trade.
Hedging is the strategy of protecting oneself against future losses or exposure. A common form of hedging in Forex is a currency option, whereby the trader gains the right to buy or sell a currency at a pre-agreed exchange rate on a specified date. Crucially, the trader is under no obligation to carry out this contract. While acting as a risk mitigation tool by protecting against losses, it also carries a risk of diminishing potential gains.
Leverage helps a trader control a larger exposure with a smaller portion of funds (margin). Forex trading often carries a large degree of leverage, where a trader can often leverage more than 100 times their original deposit.
To illustrate, Peter has deposited $1,000 into his trading account, and makes a trade and the amount of $500 is required as a margin. If PFD provides Peter a leverage rate of 100:1 (1% margin requirement), he can take an exposure of $50,000. A trader should always exercise caution when using leverage given the fact losses can be magnified significantly.
Margin / Margin Trading
When placing a trade you do not need the full position value, rather, a smaller amount of funds often referred to as 'margin.' This is simply the amount of collateral or funds required to hold your position.
For example, if you buy one contract of the USD/JPY pair which has a notional value of US$100,000, you may only need a very small percentage of the value to make the trade.
When trading currency, a profit or loss is measured in pips (percentage in point). For example, one pip movement when trading the AUD/USD pair is equal to a move from US$0.9050 to US$0.9051.
To simplify, one Aussie dollar is equal to 90.51 US cents. On most currency pairs, a pip is represented by the fourth decimal place, (or the second decimal place when trading Yen pairs), however PFD and most other Forex providers will quote prices to the fifth decimal place, (the third with Yen pairs) which represents one tenth of a pip.
Like trading in the share market, trading currencies also attracts a commission - however, unlike share trading the commission does not always come in the form of a monetary or dollar amount per trade. Instead, PFD and most FX providers will have an additional 'spread' between the buy and sell price in addition to the market spread.
The spread is the implied cost associated with trading the currency pair and highly contingent to the currency pair, market volatility and the amount of market participants. The larger the spread, the larger the commission.
Foreign Exchange Margin Requirements and Pip Values
The table below is designed to give an indication of the margin requirements and pip values for a few of the most popular currency pairs on offer. Please note the margin requirements are calculated based on the PFDPro (MT4) standard leverage ratio of 100:1. In the case of PFDTrader (MT4) where different leverage is applied to the account, the margin requirements will be different
Spot Foreign Exchange Swaps and Rollover Rates
When you buy or sell a currency, a Swap or Rollover fee may be paid or charged to you. This is the funding (interest) component which is needed to maintain your position. The amount of which you receive or pay will depend on the relative interest rate yield of each currency in the traded pair, among other important considerations such as money market rates and liquidity provider charges.
Spot Foreign Exchange ("Forex") and Metals trades are settled two business days from the entry date. Trading through PFD does not involve physical delivery and all trades left open at the end of a trading day will be rolled over to a new value date and as such will have exposure to a swap charge or credit.
It is important to note that the rollover at the close of Wednesday's trading will be three times the usual amount. This charge is market convention, accounting for weekend settlement.
PFD swap rates are calculated using a consensus of our up-stream liquidity partners and may be adjusted both positively and negatively in the interest of competitiveness and/or local costs.
Swap rates for individual currency pairs and metal contracts can be viewed by referring to your MT4 Terminal, right click on Market Watch, left click on Symbols followed by Properties. Rates shown are expressed in 'points' where 1.0 point is equal to one tenth of 1 Pip.