Frequently Asked Questions
What Is Forex?
FX or Forex describes the Foreign Exchange Market, a marketplace where the world’s various currencies are traded. Its huge volume and fluidity made the Forex market the world’s largest and most significant financial market, with well over $7 trillion traded daily, almost ten times larger than the stock market. Since Forex currency trading has no centralised marketplace, currencies can be traded in whatever market is open at any given time. This creates an excellent opportunity for traders to buy and sell currencies around the clock, 24 hours a day, five days a week, except for weekends. (Weekend FX Products will be coming soon in Q2 of 2022)
The major participants of the Forex market are commercial and central banks, large corporations, and hedge funds. However, you do not need millions or thousands of dollars to start! Due to leverage and marginal trading, you can start trading with $100 or $500 and enjoy the same trading conditions as the prominent market players. With LDN Global Markets, whether you are John Smith or a top-tier Bank, you will benefit from the same trading conditions and trade on the same spreads and execution quality.
The recipe for success is to buy it at the cheapest price and then sell it at a higher price. Or the other way round – sell at a higher price and buy cheaper. Whether a currency is increasing or declining in value, there is always a way for you to make money in Forex. Knowing the right time to buy or sell will do the trick. This is where market analytics, good trading education, indicators, signals, and automated trading systems come in handy.
What Is Leverage?
Both investors and companies use leverage. Investors use leverage to multiply their buying power in the market. Companies use leverage to finance their assets; instead of issuing stock to raise capital, they can use debt to invest in business operations to increase shareholder value. Leverage is the ratio of your funds to the size of the borrowed funds a broker provides for trading. 1:50 1:100 1:200 1:300 1:400.
Example:
1:100, meaning 1:100, is that the broker allocates your funds for trading 100 times
greater than yours. For that reason, you can invest 100000$ instead of 1000$.
Let’s say you want to invest 1000$ and you wish to trade on oil, which costs 50$ per barrel.
Without leverage, you can buy/sell 20 barrels of oil. With Leverage 1:100, you can buy/sell 2000 barrels of oil.
Remember that high leverage allows big profits but can also cause significant losses.
What Is Margin?
Margin trading allows you to take a position of much higher value than the monies deposited in your account. Margin trading or trading with leverage provides trading in the Forex market without having a large amount of capital.
What Is Pip?
A pip is the smallest unit of price change in the foreign exchange market. It is measured to the fourth decimal place of a currency pair. For example, if the EUR/USD moves from 1.07050 to 1.07060, that is a one-pip movement.
The monetary value of a pip depends on the volume of a trading transaction and is expressed in the quote currency, which is the second currency of the pair. In the example you provided, the quote currency is USD.
Example:
1Pip in EUR/USD is equal to 0.0001.
Old price: 1.07050
New price: 1.07060
The price changed by 1pip.
For comparative analysis of the major currency pairs, PIP is accepted to quote to 4 decimal places: 0.0001.
Volume
Volume is the number of lots traded in a currency pair or the entire market within a specified period. It measures trading activity and the amount of currency that changes hands from sellers to buyers.
In the spot FX, a decentralised market, partial volume figures are a proxy for the overall numbers. There is no central exchange where all trades are executed, so getting accurate volume data for the entire market can be challenging.
Volume is not synonymous with speed or volatility. A market can be very volatile even with low volume, and vice versa. For example, a market can experience a sudden spike in volatility due to a news event, even if there is not much volume traded.
Volume is a valuable tool for traders, as it can help them identify trends and assess a market’s liquidity. However, it is essential to remember that volume is not the only factor that affects price movements.
Lot
A lot is the amount of the currency pair that you are buying or selling. The three most common types of lots are standard, mini, and micro.
- Standard lot: A standard lot equals 100,000 units of the base currency. For example, if you buy one standard lot of EUR/USD, you buy 100,000 euros.
- Mini lot: A mini lot equals 10,000 units of the base currency. For example, if you buy one mini lot of EUR/USD, you buy 10,000 euros.
- Micro lot: A micro lot equals 1,000 units of the base currency. For example, if you buy one micro lot of EUR/USD, you buy 1,000 euros.
The size of the lot you trade will depend on your trading style and risk tolerance. If you are a beginner trader, start with a micro lot to minimise risk. As you gain more experience, you can increase the size of your lots.
The exchange rate of the currency pair determines the price of a lot. For example, if the exchange rate of EUR/USD is 1.1000, then the price of 1 standard lot of EUR/USD would be 110,000 USD. Another Example: 1 lot 1mini lot (0.1) 1micro lot (0.01)
EUR/USD = 100000€ 10000€ 1000€
GBP/USD = 100000£ 10000£ 1000£
USD/JPY = 100000¥ 10000¥ 1000¥
Spread
Spread is the difference between a currency pair’s bid and ask prices. The bid price is when a market maker is willing to buy a currency, and the asking price is when a market maker is ready to sell a currency. For instance:
If EUR/USD
ASK: 1.14010
Bid: 1.14000
So, the spread will be: ASK- bid= Spread
1.14010-1.40000=0.00010
The spread of EUR/USD is 1pip.
The spread is significant because it is the cost of trading a currency pair. If the spread is too high, it can eat into your profits. However, if the spread is too low, filling your trades can be difficult.
Several factors can affect the spread, including the market’s liquidity, the market’s volatility, and the fees charged by the broker.
Take Profit (TP)
A take-profit order is an order that closes your trade automatically once it reaches a certain level of profit. It is a limit order, meaning it is an order to buy or sell a security at a specific price.
Traders use take-profit orders to lock in profits and avoid losses. They are beneficial for short-term traders who are looking to profit from quick movements in the market.
When a take profit order is hit, the trade is closed at the current market value. This means that the trader will not be able to profit from further market movements. However, the trader will also not be exposed to any other losses.
Take-profit orders are placed using technical analysis. The trader will look at charts and indicators to determine when to order a take-profit. The trader will typically place a take-profit order at a level where they believe the market is likely to reverse.
Taking profit orders can be a valuable tool for traders, but they are not a guarantee of success. The market can always move against the trader, and there is always the risk of slippage. However, taking profit orders can help traders to manage their risk and to maximise their profits.
Stop Loss (SL)
You place A stop-loss order with your broker to sell a security when it reaches a particular price. It is designed to limit your losses on a position in a deposit. A stop-loss order is an automatic trade order to sell a given stock but only at a specific price level. A stop-loss order can limit losses and lock in gains on stock.
The brokerage uses the prevailing market bid price to execute the stop-loss order. Volatile market conditions or dramatically fluctuating individual stocks can inadvertently trigger a stop-loss order. Volatile conditions may also cause the final realised price to be lower than the stop-loss price.
A take-profit order is an order that closes your trade automatically once it reaches a certain level of profit. When your take profit order is hit on a trade, the trade is closed at the current market value. Take-profit orders are also sometimes referred to as limit orders.
Both stop-loss orders and take-profit orders can be helpful tools for traders, but they serve different purposes. Stop-loss orders are designed to protect your capital, while take-profit orders are designed to help you lock in profits.
Using a stop-loss or take-profit order ultimately depends on your trading style and risk tolerance. You may want to use a stop-loss order to protect your capital if you are a conservative trader. If you are a more aggressive trader, you may want to use a take-profit order to lock in profits.
Technical Analysis
Technical analysis is the study of historical price action to identify patterns and determine probabilities of future movements in the market. It is a valuable tool for traders of all experience levels, but it is essential to remember that technical analysis does not guarantee success.
Technical analysis boils down to two things:
- Identifying market trends: Technical analysts believe past price movements can help predict future price movements. By identifying the current trend, traders can make informed decisions about when to buy and sell.
- Identifying support and resistance: Support and resistance are levels where the price of a security is likely to find support or resistance. Support is a level where buyers are likely to step in and prevent the price from falling further. Resistance is a level where sellers are likely to step in and prevent the price from rising further.
Markets can only do three things: move up, down, or sideways. Prices typically move in a zigzag fashion, and as a result, price action has only two states:
- Range: When prices zigzag sideways, it is known as a range-bound market. This means that the price is not trending in either direction.
- Trend: When prices zigzag higher or lower, it is known as a trending market. This means that the price is moving in a particular direction.
Technical analysts use various tools to identify trends, support, and resistance levels. These tools include:
- Price charts: Price charts visually represent historical price movements. They can identify trends, support and resistance levels, and other patterns.
- Indicators: Indicators are mathematical formulas used to analyse price action. They can identify trends, support and resistance levels, and other patterns.
- Other analysis tools: Various other analysis tools can be used to identify trends and support and resistance levels. These tools include Fibonacci retracements, Gann angles, and Elliott waves.
Technical analysis is a complex and ever-evolving field. There are many different schools of thought on technical analysis, and there is no single “right” way to do it. However, technical analysis can be a valuable tool for traders making informed decisions about when to buy and sell.
Technical Analysis
Fundamental analysis is the study of economic factors that can affect the price of a security. Fundamental analysts believe that the price of a security is ultimately determined by its intrinsic value, which is the value of the underlying company or asset.
Fundamental analysts look at a variety of factors to determine the intrinsic value of a security, including:
Economic indicators: Fundamental analysts pay close attention to changes in economic indicators such as interest rates, employment rates, and inflation. These indicators can provide clues about the overall health of the economy, which can impact the price of securities.
Company financial statements: Fundamental analysts also look at company financial statements to assess the company’s financial health. They look at revenue, earnings, and debt levels to determine if the company is undervalued or overvalued.
Industry trends: Fundamental analysts also look at industry trends to see how they might impact the price of a security. For example, if the airline industry is growing, the cost of airline stocks might be expected to rise.
Fundamental analysis is a more complex and time-consuming approach to trading than technical analysis. However, fundamental analysts believe it is a more reliable way to predict future price movements.
Here are some of the benefits of using fundamental analysis:
- It can help you to identify undervalued or overvalued securities.
- It can help you to understand the factors that are likely to affect the price of a security.
- It can help you to make more informed trading decisions.
However, there are also some drawbacks to using fundamental analysis:
- It can be time-consuming and complex.
- It can take time to predict the future impact of economic factors on the price of a security.
- It can be challenging to find reliable data on economic indicators and company financial statements.
Whether to use fundamental or technical analysis depends on your trading style and risk tolerance. If you are a patient trader willing to research, then fundamental analysis may be a good fit. However, technical analysis may be a better fit if you are a more active trader looking to make quick profits.