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Forex

 

Open 24 hours a day 5 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, predicting 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 Forex you are buying or selling one currency against another. One of the key advantage Forex trading 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 Forex trading 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 they actually 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 increase in you gains however if not used correctly if can also result in increased losses.

 

Forex Spreads

IC Markets offers Forex traders some of the tightest spreads out of all Forex brokers globally with our EUR/USD spread averaging 0.1 pips. Tight spreads combined with our low latency enterprise grade hardware makes IC Markets the ideal choice for active day traders and 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)
EUR/USD0.00.1
GBP/USD0.00.5
AUD/USD0.00.4
USD/CAD0.00.6
USD/CHF0.00.4
USD/JPY0.00.3

Forex Trading Example

Selling EUR/USD

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 decide to take your profit by buying back 2 standard lots at 1.32129.

The gross profit on your trade is calculated as follows:

Calculation
Opening Price€200,000 x 1.33623 = USD $267,246
Closing Price€200,000 x 1.32129 = USD $264,259
Gross Profit on TradeUSD $ 2,988

It is important to note that whist your position remains open, each night your account will be debited or credited 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 charges, you may also need to include any commission charges if they are payable. You should be aware that if the market had moved in the opposite direction, you would have made a loss that could have exceeded your initial deposit.

 

Contract Details

IC Markets contract specification sheet provides further information regarding the currency pairs on offer and their spreads.