Forex Terms & Order Types

Forex Terms

Balance
The balance on your account, on the MetaTrader 4 Trading Platform shows the amount that has been deposited into your account. The balance does not reflect any open trades that you have and is thus not accurate when you want to see your current trading position.

Equity
The Equity is your real-time or actual balance. It calculates the amount in your account plus all open trades and gives you a picture of what your account is worth at that precise moment. If you were to close all your trades and withdraw your money you would get the equity amount.

Major and Minor Currencies
The eight most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD) are called the majors. These are the most liquid currencies with the lowest trading cost. All other currencies are known as minors or exotic currencies.

Base Currency
The base currency is the first currency in any currency pair. The currency quote shows how much the base currency is worth as measured against the second currency. For example, if the GBP/USD rate equals 1.5850, then one GBP is worth USD 1.5850. In the forex market, the U.S. dollar is normally considered the base currency for quotes, meaning that quotes are expressed as a unit of 1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the euro, and the Australian and New Zealand dollar.

Quote Currency
The quote currency is the second currency in any currency pair. This is frequently called the pip currency and any unrealized profit or loss is expressed in this currency.

Pip
A pip is the smallest unit of price for any currency. Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit, that is, GBP/USD equals 1.5838. In this instance, a single pip equals the smallest change in the fourth decimal place – that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent. Notable exceptions are pairs that include the Japanese yen where a pip equals 0.01.

A pip is a term you will hear very often in the trading world. This is the unit of measurement for trades. It is used to measure the size of a movement in the market. In most currencies 1 pip translates to a 0.0001 change. I will show you an easy way to measure pips so do not let the technicality bother you too much, just remember a pip is used to measure a movement in the market e.g. The US Dollar Moved 300 Pips against the Yen today.

Pipette
One-tenth of a pip. Some brokers quote fractional pips, or pipettes, for added precision in quoting rates. For example, if GBP/USD moved from 1.58156 to 1.58158, it moved 2 pipettes.

Lot
A lot is how you determine how much of your margin you use for a trade and this also plays a role in your risk. Our system calculates optimal lot size so that you do not have to calculate it manually. Therefore, a lot determines how much money you are trading per trade.

Bid Price
The bid is the price at which the market is prepared to buy a specific currency pair in the forex market. At this price, the trader can sell the base currency. It is shown on the left side of the quotation. For example, in the quote EUR/USD 1.2312/15, the bid price is 1.2312. This means you sell one British pound for 1.2312 U.S. dollars.

Ask/Offer Price
The ask/offer is the price at which the market is prepared to sell a specific currency pair in the forex market. At this price, you can buy the base currency. It is shown on the right side of the quotation. For example, in the quote GBP/USD 1.5812/15, the ask price is 1.5815. This means you can buy one euro for 1.5815 U.S. dollars. The ask price is also called the offer price.

Bid/Ask Spread
The spread is the difference between the bid and ask price. For example, the USD/JPY rate might be 118.30/118.34, but would be quoted verbally without the first three digits as “30/34.” In this example, USD/JPY has a 4-pip spread.

Quote Convention
Exchange rates in the forex market are expressed using the following format: Base currency / Quote currency = Bid / Ask

Transaction Cost
The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade. Round-turn means a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair. For example, in the case of the EUR/USD rate of 1.2812/15, the transaction cost is three pips. The formula for calculating the transaction cost is: Transaction cost (spread) = Ask Price – Bid Price

Cross Currency
A cross currency is any pair in which neither currency is the U.S. dollar. These pairs exhibit uneven price behavior since the trader has, in effect, initiated two USD trades. For example, initiating a long (buy) EUR/GBP is equivalent to buying a EUR/USD currency pair and selling GBP/USD. Cross currency pairs frequently carry a higher transaction cost.

Margin
When you open a new trading account with a forex broker, you must deposit a minimum amount with that broker. This minimum varies from broker to broker and can be as low as R1000 to as high as $100,000. Each time you execute a new trade, a certain percentage of the account balance in the account will be set aside as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units (or lots) traded. The lot size always refers to the base currency. For example, if your account provides a 100:1 leverage or 1% margin. Let’s say one mini lot equals $10,000. If you were to open one mini-lot, instead of having to provide the full $10,000, you would only need $100 ($10,000 x 1% = $100).

Used Margin is the amount of money that you have used to trade. Available Margin is the money that you still have available to use for trades. Your margin is very important as if you run out of margin the broker will close all your trades and you will be left with close to nothing. This is called a margin call. If you use the trading system and rules correctly, you will never have a margin call.

Leverage
Leverage is the ratio of the amount capital used in a transaction to the required security deposit (margin). It is the ability to control large currency amounts of a security with a small amount of capital. Leveraging varies dramatically with different brokers, ranging from 2:1 to 500:1.

Forex Broker
A forex broker is a company that facilitates the buying and selling of currencies by means of an application called a trading platform. The forex broker is connected to the market and allows you as the trader to buy and sell different currencies. All transactions are done directly with the broker. Once you have opened an account you will deposit money into your trading account via the broker. You will open and close trades and withdraw money from the broker. The broker acts as a middleman between you and the market.

Trading Platform
A Trading Platform is an application which allows you to trade the market. In most cases, you can download and install a trading platform on various devices including smart phones, tablets, Laptops and PCs. You open and close trades using the trading platform. As mentioned in the previous section a forex broker oversees the platform and you must open an account with broker prior to getting access to the platform. It is important to note that the trading platform simply allows you to buy and sell, it will not assist you in deciding what to buy or when to sell, therefore the trading system software is important.

Demo Account
A demo account is a dummy or practice account which lets you practice trading without risking your money. A demo account is connected to live market data so that you can practice real live trading conditions, the money however is dummy money which is loaded onto your account for training purposes. Once you are comfortable with your trading you will move from a demo account to a live account.

Live Account
A live account is a real trading account. This account will use the money that you deposited to enter trades. The money in this account is real and all profit is yours and so are all losses. You will not see any money in your live account until you deposit funds.

Instrument
An instrument is anything you can trade e.g. Gold, Oil, US Dollar etc. Any currency or commodity that you can trade on your platform is called an instrument.

Open a Trade
When we say open a trade we mean that you buy or sell an instrument. Spot forex is a CFD (Contracts for Difference) we can trade instruments in both directions. If we believe the value of an instrument will increase, we will buy the instrument. If we are correct we will make profit. Similarly, if we believe that the value of an instrument will decrease we will sell it. If it decreases, we will make a profit.

Close a Trade
When you close a trade, you are removing the trade from the market, and banking the trade, realizing the profit or loss. The amount of money that you have made or lost will be determined by the profit or loss that the trade was at the time of closing. If you were in $100 profit and you closed the trade $100 would have been added to your account. If your trade was at $100 loss, then $100 will be deducted from your account. You must close trades regularly to take profit, limit losses and allow for other trades.

Trading System
A trading system is a set of rules combined with software that assist you in making decisions on when to buy and when to sell. The trading system allows you trade in a systematic methodical way and assists you in making the correct decisions in a live trading environment which can be easy or complicated to use for a new trader.

Indicator
An indicator is a visual representation of a mathematical formula that is displayed on a chart. This makes it easy as you do not have to sit with a calculator and work out complex equations. You can see them right on your chart, they are calculated in real time and move with the market. We make use of several as professional traders.

Types of Forex Orders

The term order refers to how you will enter or exit a trade. Here we explain the different types of forex orders that can be placed into the forex market. Be sure that you know which types of orders your broker accepts. Different brokers accept different types of forex orders. Basic order types are offered by all brokers.

Pending Order
A pending order is an order that you can setup to trigger when a certain price is reached. e.g. If you would like to buy US Dollars with Rands but you would only like to do so when the dollar goes back to R12 then, you can set a pending order to automatically buy dollars at this price. This is a great tool and saves you hours of time. Without pending orders, we would have to sit in front of our screens watching the market all day.

Stop Loss
A Stop Loss or SL is a tool which we use to protect our account. A stop loss acts as a safety net. We set a stop loss in the opposite direction of which we would like the market to go. If the market goes in the wrong direction and the trade is in a loss, the stop loss will close the trade in a loss at a certain level, limiting the loss to a certain amount per trade. The SL is set at the amount we are willing to risk for a trade.

Take Profit
A Take Profit of TP is your profit target. You set a certain price and at this price your profit will automatically be banked. So, it does the same as a stop loss but the net result is profit where with a stop loss the net result is a loss. It is extremely important to use both SL and TP levels for proper money management.

Market order (Market Execution)
A market order is an order to buy or sell at the best available price. For example, the bid price for GBP/USD is currently at 1.3240 and the ask price is at 1.3242. If you wanted to buy GBP/USD at market, then it would be sold to you at the ask price of 1.3242. Click buy and your trading platform would instantly execute a buy order at that exact price. Select the currency pair and click once to buy.

Limit Entry Order (Pending Order)
A limit entry is an order placed to either buy below the market or sell above the market at a certain price. For example, GBP/USD is currently trading at 1.3050. You want to go short if the price reaches 1.3070. You can either sit in front of your computer and wait for the price to reach 1.2070 (at which point you would click a sell market order), or you can set a sell limit order at 1.2070 (then you could walk away from your computer and do something else). If the price goes up to 1.2070, your trading platform will automatically execute a sell order at the best available price.

Stop-Entry Order (Pending Order)
A stop-entry order is an order placed to buy above the market or sell below the market at a certain price. For example, GBP/USD is currently trading at 1.3050 and is heading upward. You believe that price will continue in this direction if it hits 1.3060. You can do one of the following: sit in front of your computer and buy at market when it hits 1.3060, or set a stop-entry order at 1.3060. You use stop-entry orders when you feel that price will move in one direction

Stop-Loss Order
A stop-loss order is a type of order linked to a trade for preventing additional losses if price goes against you. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order. For example, if you buy (long) GBP/USD at 1.3230. To limit your maximum loss, you set a stop-loss order at 1.3200. If you were wrong and GBP/USD falls to 1.3200 instead of moving up, your trading platform would automatically execute a sell order at 1.3200 and close out your buy position for a 30-pip loss. Stop-losses are beneficial when you don’t want to sit in front of your computer all day. You can set a stop-loss order on any open positions to limit your loss on the trade and have the trade closed at a certain price.

Trailing Stop
A trailing stop is a type of stop-loss order attached to a trade that moves as price fluctuates. Let’s say that you’ve decided to sell (short) EUR/USD at 1.1130, with a trailing stop of 30 pips. This means that initially, your stop loss is at 1.1160. If the price goes down and hits 1.1100, your trailing stop would move down to 1.1130 (the breakeven point). The stop-loss will stay at this new price level of 1.1130. It will not change if market goes higher against you.

Going back to the example, with a trailing stop of 30 pips, if EUR/USD hits 1.1070 then your stop would move to 1.1100 (30 pips in profit). Your trade will remain open if price does not move against you by 30 pips. Once the market price hits your trailing stop price, your position will be closed automatically by a market order at the best available price.

Unusual Forex Orders

Good ‘Till Cancelled (GTC)
A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore, it is your responsibility to remember that you have the order scheduled.

Good for the Day (GFD)
A GFD order remains active in the market until the end of the trading day. Because foreign exchange is a 24-hour market, this usually means 01:00 CAT since that’s the time rollover happens, but we’d recommend you double check with your broker.

One-Cancels-the-Other (OCO)
An OCO order is a mixture of two entry and/or stop-loss orders. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled. Let’s say the price of GBP/USD is 1.3040. You want to either buy at 1.3095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.2985. The understanding is that if 1.3095 is reached, your buy order will be triggered and the 1.2985 sell order will be automatically canceled.

One-Triggers-the-Other
An OTO is the opposite of the OCO, as it only puts on orders when the main order is triggered. You set an OTO order when you want to set profit taking and stop loss levels ahead of time, even before you get in a trade. For example, AUD/USD is currently trading at 1.2000. You believe that once it hits 1.2100, it will reverse and head downwards but only up to 1.1900. The problem is that you will be gone for an entire week, to catch the move while you are away, you set a sell limit at 1.2000 and at the same time, place a related buy limit at 1.1900, and just in case, place a stop-loss at 1.2100. As an OTO, both the buy limit and the stop-loss orders will only be placed if your initial sell order at 1.2000 gets triggered

How to Trade Forex

What is a Pip in Forex?

Pip is an abbreviation for ‘Point in Price’. It is a unit of value of currency, a very small amount, 0.0001 is one pip. One pip is equal to 1/100 of a Cent. It is required for all forex traders to calculate profit and loss. Using pips and lots profit and loss calculations can be done before, during or after a trade has taken place.

The unit of measurement to express the change in value between two currencies is called a pip. If EUR/USD moves from 1.2250 to 1.2251, that .0001 USD rise in value is 1 pip. A pip is usually the second to last decimal place of a quotation. Most pairs go out to 5 decimal places, but there are some exceptions like Japanese Yen pairs they go out to three decimal places. Brokers quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places. They are quoting fractional pips, 1.51542 to 1.51543, that .00001 USD move higher is 1/10 of a pip.

What is a Lot in Forex?

In the past, spot forex was only traded in exact amounts called lots. The standard size for a lot is 100,000 units. There are also a mini, micro, and Nano lot sizes that are 10,000, 1,000, and 100 units respectively.

As you may already know, the change in currency value relative to another is measured in pips, which is a small portion of a unit of currency’s value. To take advantage of this small change in value, you need to trade large amounts of a currency to see any significant profit or loss.

Let’s assume we will be using a 100,000-unit (standard) lot size. We will now recalculate some examples to see how it affects the pip value.

  1. EUR/USD at an exchange rate of 1.1930(.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
  2. GBP/USD at an exchange rate or 1.8040(.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.
  3. USD/JPY at an exchange rate of 119.80(.01 / 119.80) x 100,000 = $8.34 per pip
  4. USD/CHF at an exchange rate of 1.4555(.0001 / 1.4555) x 100,000 = $6.87 per pip

As the market moves, so will the pip value depending on what currency you are currently trading.

How to profit from being a forex trader?

In the forex market, you buy or sell currencies. Placing a trade in the foreign exchange market is simple, the way you trade forex is similar to other markets; like the stock market. If you have traded stocks (shares), you can trade forex. Forex trading is exchanging one currency for another to profit in the expectation that the price will change. The currency bought increases in value compared to the one sol, and vice versa. An exchange rate is the ratio of one currency compared to another currency. For example, the GBP/USD exchange rate displays how many U.S. dollars it costs for one British pound, or how many US dollars you need to buy one British pound.

How to Read a Forex Quote

Currencies are always quoted in pairs, such as GBP/USD or AUD/USD. The origin of why they are quoted in pairs is since in every foreign exchange transaction, you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:

The first listed currency to the left of the slash (“/”) is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar). When buying, the exchange rate tells you how much you must pay in units of the quote currency to buy one unit of the base currency. In the example, above, you must pay 1.51258 U.S. dollars to buy 1 British pound. When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example, above, you will receive 1.51258 U.S. dollars when you sell 1 British pound.

The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency; buy EUR, sell USD. You would buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency. You would sell the pair if you think the base currency will depreciate (lose value) relative to the quote currency.

Long/Short

First consider whether to buy or sell. If you want to buy (which means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. Professional traders would call this going long or taking a long position; long equals buy.

If you want to sell (which means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called going short or taking a short position; short = sell.

Bid/Ask

All forex prices are quotes with two prices: the bid and the ask, the bid is lower than the ask price. The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency. This means the bid is the best available price at which you (the trader) will sell to the market. The ask is the price at which your broker will sell the base currency in exchange for the quote currency. This means the ask price is the best available price at which you will buy from the market, ask is also known as the offer price.

The difference between the bid and the ask price is popularly known as the spread. On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588. If you want to sell EUR, you click the Sell button and you will sell euros at 1.34568. If you want to buy EUR, you click the Buy button and you will buy euros at 1.34588.

When to Buy, or Sell a Currency Pair
In the following examples, we are going to use fundamental analysis to help us choose whether to buy or sell a specific currency pair.

EUR/USD
The Euro is the base currency and thus the basis for the buy/sell. If we think that the U.S. economy will weaken, which is bad for the U.S. dollar, you would execute a buy EUR/USD order. By doing so, you have bought euros in the expectancy that they will rise versus the U.S. dollar.

If you believe that the U.S. economy is strong and the euro will weaken against the U.S. dollar you would execute a sell EUR/USD order. By doing so you have sold euros in the expectancy that they will fall versus the US dollar.

USD/JPY
In this example, the U.S. dollar is the base currency and thus the basis for the buy/sell. If you think that the Japanese government is going to weaken the yen to help its export industry, you would execute a buy USD/JPY order. By doing so you have bought U.S dollars in the expectancy that they will rise versus the Japanese yen.

If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to yen, and this will weaken the U.S. dollar, you would execute a sell USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.

GBP/USD
In this example, the pound is the base currency and thus the basis for the buy/sell.
If you think the British economy will strengthen against the U.S. in terms of economic growth, you would execute a buy GBP/USD order. By doing so you have bought pounds in the expectation that they will rise versus the U.S. dollar.
If you believe the British’s economy is reducing while the United States’ economy remains strong, you would execute a sell GBP/USD order. By doing so you have sold pounds in the expectancy that they will depreciate against the U.S. dollar.

Margin Trading

In the forex market, currencies come in lots of 1,000 units of currency (Micro), 10,000 units (Mini), or 100,000 units (Standard) depending on your broker and the type of account you have. Margin trading is the term used for trading with borrowed capital. This is how you’re able to take larger transactions, quickly and inexpensively, with a small amount of initial capital.

Example:

Signals in the market are indicating that the British pound will go up against the U.S. dollar.

You open a trade of size, one standard lot (100,000 units GBP/USD), buying with the British pound at 1% margin and wait for the exchange rate to climb. When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50000).

If the margin requirement was 1%, then US$1,500 would be set aside in your account to open the trade (US$150,000 * 1%). You now control 100,000 pounds with just US$1,500. When you decide to close a position, the 1% margin that you placed when opening the trade is returned to you and a calculation of your profits or losses is done and credited to your account.

Your predictions come true and you decide to sell. You close the position at 1.50600. Your profit from the trade is $600.

Rollover

All open positions, known as trades incur a charge for being held overnight, once a position is held past your broker’s rollover time (usually 02:00 CAT), there is a daily rollover interest rate that a trader either pays or earns, depending on your margin cost and position in the market. If you do not want to earn or pay interest on your positions, make sure they are all closed before rollover time. Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought. If you are buying a currency with a higher interest rate than the one you are borrowing, then the net interest rate differential will be positive; example the USD/JPY. Equally, if the interest rate differential is negative then you incur a cost.

What is leverage?

Any size investor can trade much larger amounts of money using leverage. A forex trading broker is like a bank who loans you money to trade currencies. All the brokers will require from you is that you place a margin of the loan as a deposit, which is refundable when the trade is closed. This is how forex trading using leverage works. The amount of leverage you use will depend on your broker and what you feel comfortable with, usually 100:1 or 200:1. Based on the leverage used each trade taken will incur a margin per lot traded. Once you have deposited your money you will then be able to trade.

For example, if the allowed leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, but you only have $5,000 in your account. No problem as your broker would set aside $1,000 as down payment, or the margin, and let you borrow the rest. Any losses or gains will be deducted or added to the remaining cash balance in your account. The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

How to calculate profit and loss?

So now that you know how to calculate pip value and leverage, let’s look at how you calculate your profit or loss.

For example if we buy U.S. dollars and Sell British pounds.

  1. The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the ask price of 1.4530, or the rate at which traders are prepared to sell.
  2. You buy 1 standard lot (100,000 units) at 1.4530.
  3. Two hours later, the price moves to 1.4550 and you decide to close your trade.
  4. The new quote for USD/GBP is 1.4550 / 1.4555. Since you’re closing your trade and you initially bought to enter the trade, you now sell to close the trade so you must take the bid price of 1.4550. The price traders are prepared to buy at.
  5. The difference between 1.4530 and 1.4550 is 0.00020 or 20 pips.
  6. Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40

When to Trade

Forex Trading Sessions
There are different forex trading sessions, the forex market is open 24 hours a day, but most active during the European and American trading sessions. Profits from trading can be made when the market is moving up, down or sideways. A professional trader finds it difficult to make money when the market is not moving a low volatility times during the day.

Forex Market Hours
The currency market can be divided into three major trading sessions: the Asian session, the European session, the American session. Below are tables of the open and close times for each session:

Times vary summer to winter because of Day-Light Savings

Actual open and close times are based on local business hours. This varies during the winter as some countries shift to/from daylight savings time (DST). The day within each month that a country may shift to/from DST also varies. In-between each forex trading session, there is a period where two sessions are open at the same time. The overlap of the European and American sessions is the busiest times during the trading day because there is more volume when two markets are open at the same time.

Now we look at the average pip movement of the major currency pairs during each forex trading session.

From the table, you will see that the European session normally provides the most movement.

Asian Session

The opening of the Asian session at 01:00 CAT marks the start of the trading day. You should take note that the Tokyo session is sometimes referred to as the Asian session because Tokyo is the financial capital of Asia. Japan is the third largest forex trading center in the world. The yen is the third most traded currency, involved in 16.50% of all forex transactions. Generally, just over 20% of all forex transactions take place during this session.

The table below illustrates the pip ranges of the major currency pairs during the Asian session.

These pip values were calculated using averages of past data, these are not absolute and can change depending on liquidity and other market conditions.

Characteristics of the Asian Session

  • The major countries involved are Japan, Hong Kong, Sydney and Singapore.
  • The main market participants are export companies and central banks. Asia’s economy is seriously export dependent, Japan, China and Korea are major trade players, there are a lot of transactions taking place daily.
  • Liquidity during the Asian session can sometimes be very low.
  • It is more likely that you will see stronger moves in Asia Pacific currency pairs like AUD/USD and NZD/USD as opposed to non-Asia Pacific pairs like GBP/USD.
  • During times of low liquidity, most pairs stay within a range. This provides opportunities for short day trades or potential breakout trades later in the day.
  • Most of the action takes place early in the session, when more economic data is released.
  • Moves in the Asian session could set the tone for the rest of the day. Traders in latter sessions will look at what happened during the Asian session to help organize and evaluate what strategies to take in other sessions.
  • Traditionally after big moves in the preceding American session, we market consolidates during the Asian session.

Which Pairs to Trade?
Since the Asian session is when news from Australia, New Zealand, and Japan comes out, this presents an opportunity to trade using fundamentals; news events. Furthermore, there could be more movement in yen pairs as many yen transactions are traded as Japanese companies conduct business. China is an economic superpower, so whenever news comes out from China, it tends to create volatile moves. With Australia and Japan relying heavily on Chinese demand, we could see greater movement in AUD and JPY pairs when Chinese data comes in.

European Session
The European session starts lead by volatility in London, and other major European economies; France, Germany. As the Euro session starts the Asian session is ending. In history, London has always been at a center of trade, thanks to its deliberate location. 30% of all forex transactions occur during the London session.

  • Most trends begin during the London session, and they typically will continue until the beginning of the New York session.
  • Volatility tends to die down in the middle of the session, as traders often go off to eat lunch before waiting for the New York trading period to begin.
  • Trends can sometimes reverse at the end of the London session, as European traders may decide to lock in profits.
  • Due to the large amount of transactions that take place, the London trading session is normally the most volatile session. This leads to high liquidity and potentially lower transaction costs, lower spread.

Below is a table of the London session pip ranges of the major currency pairs. These pip values were calculated using averages of past data from 2012

Which currency pairs to trade?
Because of the volume of transactions that take place, there is so much liquidity during the European session that almost any pair can be traded.

  • The majors (EUR/USD, GBP/USD, USD/JPY, and USD/CHF)
  • The yen crosses (more specifically, EUR/JPY and GBP/JPY), as these have a habit being volatile during the European session.

American Session
The American session starts lead by volatility in New York, the financial center point of trade. Look to New York for confidence in trends and confirmation of technical price patterns. As the American session starts the European session is ending.

  • There is high liquidity during the American morning, as it overlaps with the European session.
  • Most economic reports are released near the start of the New York session.
  • 85% of all trades involve the dollar, so whenever big time U.S. economic data is released, it has the potential to move the markets.
  • Once European markets close, liquidity and volatility tends to die down during the American afternoon.
  • There is no volatility or price movement on Friday afternoon (end of American session).
  • Ahead of the weekend American traders close their positions to limit exposure to news over the weekend.

Below is a table of the New York session pip ranges of the major currency pairs. These pip values were calculated using averages of past data from 2012.

Which currency pairs to trade?
Take note that there will be a ton of liquidity as both the U.S. and European markets will be open at the same time. This allows you to trade practically any pair, although it would be best if you stuck to the major and minor pairs and avoid exotic pairs. The U.S. dollar is on the other side of most transactions; traders in the American session will be paying attention to U.S. data that is released. When reports are released that differ to the forecast, the market can react with a major bullish or bearish price movement in USD based currency pairs.

Times of Day to Trade Forex

Liquidity is greatest when critical mass of traders is directly participating in the buying and selling of currencies in the forex market. This materializes during the overlap of two trading sessions.

Asian & European Connection
Liquidity during this session is thin for a few reasons. Typically, there isn’t as much movement during the Asian session. look for potential trades to take for the London and New York sessions.

European & American Connection
Many participants enter at this point in the trading day, trading activity is at its uppermost point for the day. This is the busiest time of day, as traders from the two largest financial centers (London and New York) begin trader side by side. During this period, there is a high probability for big price moves due to fundamental reports out of Canada and the United States. As well as late news report out of Europe. Established trends continuing from the European session into the American session with US traders entering the market, after seeing what happened earlier in the day. At the end of this session, some European traders may be closing their positions, which could lead to some price moves right before lunch time in America.

Days of the Week to Trade Forex

The European session is the biggest trading liquidity, in comparison, certain days in the week show more movement. Below is a chart of average pip range for the major pairs for each day of the week, as you can see, it is ideal to trade Tuesday, Wednesday and Thursday. We know on Friday the market slows down after the European session closes. The busiest times are usually the best times to trade since high volatility tends to present more opportunities.

Manage your time

Unless you don’t sleep, there is no way you can trade all sessions. Even if you could, why would you? While the forex market is open 24 hours daily, it doesn’t mean that action happens all the time. As a part of being a professional trader one must learn when to trade, and not to trade.

When to Trade:

  • When two sessions are overlapping, these are also the times where major news events are released possibly causing volatility and price movements.
  • The European session tends to be the busiest out of the three.
  • The middle of the week typically shows the most movement, as the pip range widens for most of the major currency pairs.

When NOT to Trade:

  • Saturdays and Sundays – relax and rest over the weekend.
  • Fridays – liquidity comes to an end for during the last part of the American session.
  • Holidays – everybody is taking a break.
  • Major news events
  • During major sport or major event on TV

Benefits of Forex Trading

Benefits of being a Professional Forex Trader

The lists of benefits and rewards of trading forex goes on and on. Here are a few of the biggest advantages of trading the forex market:

No commissions
No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail brokers are compensated for their services through something called the bid/ask spread and if your trade is held overnight; swops.

No middlemen
Spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a currency pair. Be wary of B-Book brokers acting as middlemen who trade against their clients.

No fixed lot size
In the futures markets, lots or contract size are set by the exchanges. A standard-size contract for silver futures is 5,000 ounces. In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (this tiny amount is not practical for trading). Although the standardized minimum position in spot forex is 0.01 lots which equals $0.10 per pip movement.

Low transaction costs
The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. At larger dealers, the spread could be as low as 0.07%. Of course this depends on your leverage.

A 24-hour market
The retail forex market is a 24 hour a day, 5 days a week market. The market opens on Monday morning in time with the Australian stock market and only closes on Friday afternoon with the close of the New York market. This is one of the biggest benefits as trading does not close at the end of every weekday. For those who want to trade on a part-time basis, you can choose when you want to trade: morning, noon, night, at any point in your day, or while you sleep.

No one can corner the market
The foreign exchange market is so big and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time.

Leverage
In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, a forex broker may offer 100-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $5,000 worth of currencies. Similarly, with $500 dollars, one could trade with $50,000 dollars and so on. While this is advantage, let’s remember that leverage works both ways. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.

High Liquidity
Because the forex market is so big, it is also very liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse you can instantly buy and sell at will as there will usually be someone in the market willing to take the other side of your trade. You are never be stuck in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).

Low Barriers to Entry
You would think that getting started as a currency trader would cost a lot of money. The fact is, when compared to trading stocks, options or futures, it doesn’t. Online forex brokers offer “mini” and “micro” trading accounts, some with a minimum account deposit of $100. We’re not saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn’t have a lot of start-up trading capital.

Forex Market vs Stock Market

There are around 2,800 stocks listed on the New York Stock exchange. Another 3,100 are listed on the NASDAQ. Which one will you trade? Do you have the time to stay up-to-date of so many companies? In spot currency trading, there are dozens of currencies traded, but many market players trade the four major pairs. Aren’t four pairs much easier to keep informed on than thousands of stocks? That’s just one of the many advantages of the forex market over the stock markets. Here are a few more:

24-Hour Market
The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 3:00 am CAT until Friday at 12:00 pm CAT, with customer service usually available 24/7. With the capability of trading during the U.S., Asian, and European market hours, you can customize your own trading schedule.

Minimal or No Commissions
Most forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone. Combined with the tight, consistent, and fully transparent spread, forex trading costs are lower than those of any other market. Most brokers are compensated for their services through the bid/ask spread.

Instant Execution of Market Orders
Under normal market conditions, your trades are instantly executed. The price shown when you execute your market order is the price you get. You’re able to execute directly off real-time streaming prices, online from your trading platform. Keep in mind that many brokers only guarantee stop, limit, and entry orders under normal market conditions. Trading during a massive fundamental news announcement of global disaster would not fall under “normal market” conditions. Orders are filled instantaneous most of the time, but under extraordinarily volatile market conditions, order execution may experience delays.

Short-Selling without an Uptick
Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or whichever way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural predisposition to the market. So you always have equal access to trade in a rising or falling market.

No Middlemen
Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees. Spot currency trading, on the other hand, is decentralized, which means quotes can vary from different currency dealers. Competition between them is so fierce that you are almost always assured that you get the best deals. Forex traders get quicker access and cheaper costs.

Buy/Sell programs do not control the market
How many times have you heard that “Fund A” was selling “X” or buying “Z”? The stock market is very susceptible to large fund buying and selling. In spot trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small. Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unparalleled.

Analysts and brokerage firms are less likely to influence the market
Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as “buy,” when the stock was rapidly declining? It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it. IPOs (companies being publicly listed) are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear. Foreign exchange, as the prime market, generates billions in revenue for the world’s banks and is a necessity of the global markets. Analysts in foreign exchange have very little effect on exchange rates; they just analyze the forex market.

Forex vs. Futures
The forex market is also acknowledged as having many advantages over the futures market, like its advantages over stocks.

Liquidity
In the forex market, $5.3 trillion is traded daily, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. The futures market trades a smaller daily volume of $30 billion per day. The futures markets can’t compare with its relatively limited liquidity. The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage, with exception to extremely volatile market conditions.

24-Hour Market
At 12:00 am CAT Monday, trading begins as markets open in Sydney. At 2:00 am CAT the Tokyo market opens, followed by London at 10:00 am CAT. And finally, New York opens at 3:00 pm CAT and closes at 11:00 p.m. CAT. After New York trading closes, the Sydney market opens back up again – it’s a 24-hour market. As a professional trader, this allows you to react to favorable or unfavorable news by trading immediately. If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride. Overnight markets in futures contracts do exist, and while liquidity is improving, they are still lightly traded relative to the spot forex market.

Minimal or no commissions
With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions. But really, the commission fees are small compared to what you pay in the futures market. The competition among spot forex brokers is so aggressive that you will most likely get the best quotes and very low transaction costs.

Price Certainty
When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution. Even with the arrival of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain. The prices quoted by brokers often represent the previous trade, not necessarily the price for which the contract will be filled.

Guaranteed Limited Risk
Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account. Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account. During normal market conditions, all open positions will be closed immediately (during fast market conditions, your position could be closed beyond your stop loss level). In the futures market, your position may be liquidated at a loss bigger than what you had in your account, and you will be liable for any resulting deficit in the account.

How the Forex Market works

The Forex Market is Decentralized
In the present day, the world’s forex market is the greatest market of all time, with daily trading exceeding 5 trillion dollars, the competition between brokers, trades and the other market participants is aggressive. The currency market has no central exchange, contrasting to traditional markets where the trading is controlled at a central point.

Prices of all currency exchanges are not cleared by a central exchange. Therefore, the price can vary from broker to broker when trading the spot FX market. The market is competitive so if you have the information and know what you look for you can get the best pricing. Forex trading can be done from literally anywhere in the world, provided you have a liquidity provider (i.e. a broker) you can find buyers and sellers for all currency pairs.

The FX Market Broken-Up
Even though the market for trading forex is decentralized, the market participants and their trading volume is widely known, as listed below:

Major world banks and some smaller banks make up the largest portion of the currency market and are called the interbank market. The banks trade with each other or through an electronic trading platform, like the Electronic Brokering Services or the Reuters Dealing 3000-Spot Matching. The rate at which each bank will loan or will trade a currency pair is listed, each bank makes loans to each other based on their credit relationship with each other. The better the relationship the better the larger the loan and the better the interest rates.

Next are the hedge funds, corporations and brokers; retail market makers, and ECNs brokers. Since these institutions do not have as strong credit relationships with the participants of the interbank market, they must do their transactions via commercial banks. This means that their rates are slightly higher and more expensive than those who are part of the interbank market.

Lastly are profession non-institution trades or retail traders, like you and me. It used to be difficult for retail traders in the forex market. However, with the birth of the internet, electronic trading became available to all. Retail brokers emerged to cater for this growing market and no there are no barriers and nothing stopping an individual to trade the forex market like world’s largest banks.

Forex Market Participants

1: The Speculators
Speculators as forex market participants are professional and amateur retail forex traders. Some have more capital than others. Before the year 2000, only the rich could benefit playing this game, minimum requirement was at least ten million dollars. The average person was not supposed to be able to profit from the forex market. It was built to be used by big banks and reserve banks. The internet changed everything, allowing retail brokers to open accounts for retail traders anywhere in the world. To fully understand the forex market, we must analyze the other participants.

2: The World’s biggest Banks
The super banks determine the exchange rate for currency, by doing so forming an interbank market. Spread prices are quoted for bid/ask, based on the supply and demand, all this is possible as the forex market is decentralized. This interbank market generates the major of forex trading volumes with transactions for their clients and themselves. These are some of the biggest banks in the world: UBS, JP Morgan Chase, Citigroup, Deutsche Bank and Barclays Capital. These banks comprise most of the forex markets’ daily transactions.

3: Central Banks and National Reserve Banks
Almost each National Government has a reserve bank; in addition, some entire regions have reserve banks too called central banks like, The Reserve Bank of South Africa or The ECB (European Central Bank). These institutions govern and control pricing within of the forex market. Central banks affect the forex market adjusting interest rates to control inflation, by doing so affecting currency valuation. Furthermore, a central bank can start greatly selling or buying a currency to realign exchange rates. The worlds governments participate in the forex market for their operations, international trade payments, and managing their foreign exchange reserves.

4: Big Corporations
Large public and private companies participate in the foreign exchange market. International mergers and acquisitions between large companies can alter exchange rates. In addition, import and export of goods and services by big corporations can cause currency variation. Big companies are not the major forex markets participants and therefore deal with big banks for their forex transaction.

Retail Forex Brokers
In the past, only the big speculators and highly capitalized investment funds could trade currencies, but thanks to retail forex brokers and the Internet, this isn’t the case anymore. Anybody can find a broker, open an account, deposit money, and trade forex from home. Traditional brokers can be either Market Makers (B-Book) or ECN (A-Book). Market Makers set their own bid and ask price, ECN brokers use the most competitive bid and ask price available from different sources on the interbank market.

Market Makers
Retail Market Makers allow traders to take very small contracts. They do this by purchasing liquidity at wholesale prices, adding a markup and breaking it down into small units called micro lots. The market maker will traditionally offer spread trading, for example if the buying price (bid) for GBP/USD is 1.25000 and the selling price (ask) is 1.25003, then the bid/ask spread is 0.0003. This is a small amount; around one thirtieth of a cent. However, with the forex market as big as it is market makers can experience relevantly high trading volumes from all over the world.

ECN (Electronic Communications Network)
An ECN broker uses the ECN to automatically match customer’s buy and sell orders. These orders are executed through the Electronic Communications Network from different market makers, banks, and other traders who use the ECN. When a sell or buy, order is made, it is matched up to the best bid/ask price. ECN brokers typically charge a small commission for the trades you take. The combination of tight spreads and small commission usually make transaction costs cheaper on ECN brokers.

Forex

If you’ve ever traveled to another country, you typically had to find a currency exchange booth at the airport, and then exchange the money you have, into the currency of the country you are visiting. When at the counter you may notice, a screen displaying different exchange rates for different currencies. You find “Indian Rupee” and think to yourself, my one Rand is worth 5 Rupees. And I have a thousand Rand, after the conversion now I have 5000 Rupees.

When you do this, you’ve basically contributed to the forex market. You’ve exchanged one currency for another. Or in forex trading terms, assuming you’re a South African visiting India, you’ve sold Rand’s and bought Rupees. Before you fly back home, you stop by the currency exchange booth to exchange the Rupees that you have left over and notice the exchange rates have changed. It’s these changes in the exchanges rates that allow you to make money in the foreign exchange market. The foreign exchange market, which is usually known as “forex” or “FX,” is the largest financial market in the world. Compared to the much smaller $22.4 billion per day volume of the New York Stock Exchange (NYSE), the foreign exchange market has a $5.3 TRILLION a day trade volume.

Check out the graph of the average daily trading volume for the forex market, New York Stock Exchange, Tokyo Stock Exchange, and London Stock Exchange:

 

The forex market is over 200 times bigger that the NYSE. The $5 trillion covers the entire global foreign exchange market, but retail traders, like yourself, trade the spot market and that’s about $1.49 trillion. The forex market is big, but not as big as the media would like you to believe.

What Is Traded in Forex?
Forex is money; therefore, money is traded. In the forex market, you’re not buying anything physical, you are trading the underlying value of a currency. Think of buying a currency as buying a share in a country, like buying stocks in a company. The price of the currency is usually a direct reflection of the market’s opinion on the current and future strength of its respective economy. In forex trading, when you buy, say, the British pound, you are technically buying a share in the British economy. You are wagering that the British economy is doing well, and will even get better as time goes. Once you sell those British pounds back to the market, with some skill, you will end up with a profit. In general, the exchange rate of a currency versus other currencies reflects the condition of that country’s economy, compared to other countries’ economies.

Major Currencies

Currency symbols always have three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency. Take AUD for instance. AU stands for Australia, while D stands for dollar. The currencies included in the chart above are called the majors because they are the most widely traded.

Buying and Selling in Currency Pairs
Forex trading is the instantaneous buying of a currency and selling of another. Spot currencies are quoted through a broker, liquidity provider or dealer, and are traded in pairs; for example, the British pound and the U.S. dollar (GBP/USD) or the Euro and the Australian dollar (EUR/AUD). When you trade, you buy or sell in currency pairs. Envision each currency pair continually in a push and pull with each other. Both currencies getting weaker and stronger over time as the price of the currency pair changes up and down.

Major Currency Pairs
The following currency pairs are known as the majors. These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded. The majors are the most liquid and widely traded currency pairs in the world.

Major Cross-Currency Pairs or Minor Currency Pairs
Currency pairs that don’t contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the crosses. Major crosses are also known as minors. The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.

Euro Crosses

Pound Crosses

Yen Crosses

Other Crosses (AUD, NZD, CAD)

Exotic Currency Pairs
Exotic currency pairs are made up of one major currency paired with the currency of an emerging economy, such as South Africa, Brazil, Singapore or Mexico. The currency of a country with an emerging economy is not as valuable as the Majors and therefore not traded as much. The trading activity on exotic currency pairs takes places at a slower volatility than the majors and the crosses therefore the transaction cost (the spread) is more expensive (bigger) when trading exotic currency pairs. It isn’t unusual to see spreads that are two or three times bigger than that of EUR/USD or USD/JPY. Professional traders typically do not trade exotic currencies, without having fundamental knowledge.

Liquidity & Market Size
Unlike other financial markets like the New York Stock Exchange, the forex market has neither a physical location nor a central exchange. The forex market is considered an Over-the-Counter (OTC), or Interbank market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period. This means that the spot forex market is spread all over the globe with no central location. They can take place anywhere. The forex market can be traded by anyone, from anywhere in the world, there is an internet connection and a computer device.

The worlds currency market is by far the biggest and most widespread financial market, traded globally by a vast number of individuals and institutions. In the currency market, traders determine who they want to trade with depending on trading conditions, attractiveness of prices, and reputation of the trading counterpart.

The chart below shows the seven most actively traded currencies. The dollar is the most traded currency, comprising almost 85% of all transactions. The euro’s share is second at around 40% while that of the yen is third at just under 20%

*Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%

The Dollar is half the Forex Market
The United States Dollar (USD) is the most widely used currency, the USD is on one side of every major currency transaction and the major forex pairs include 755 of all trades. The International Monetary Fund (IMF) stated the United States Dollar is just over 60% of the world’s official foreign exchange reserves. That’s means over half the world currency is being held in USD. Forex Traders, investor, businesses, and big central banks own dollars. In times of global market uncertainty and crisis the United States Dollar acts as a world standby currency, strengthening the USD, and its role in the forex market:

Currency Composition of World FX Reserves

  • The U.S. dollar is the reserve currency of the world.
  • The United States of America has the largest and most liquid financial markets in the world.
  • The United States economy and political are large and influence world politics.
  • The United States has the by far the world’s largest military power and budget.
  • The USD is the medium of exchange for many cross-border transactions. (For example, oil is priced in U.S. dollars. So, if Mexico wants to buy oil from Saudi Arabia, it can only be bought with U.S. dollar. If Mexico doesn’t have any dollars, it must sell its pesos first and buy U.S. dollars.)

Speculation in the Forex Market
One important thing to note about the forex market is that while commercial and financial transactions are part of trading volume, most currency trading is based on speculation. In other words, most trading volume comes from traders that buy and sell based on intraday price movements. The trading volume brought about by speculators is estimated to be more than 90%. The scale of the forex market means that liquidity, is very high. This makes it very easy for anyone to buy and sell currencies. From the perspective of an investor, liquidity is very important because it determines how fast price can change over a given time-period. A liquid market environment like forex enables large trading volumes to happen with a small effect on the price, or price action. While the forex market is relatively very liquid, the market depth could change depending on the currency pair and time of day.

Ways to Trade Forex
The general types are forex spot, futures, options, and exchange-traded funds (or ETFs).

Spot Market
In the spot market, currencies are traded immediately or on the spot, using the current market price. It is simple, liquid and has tight spreads, and round-the-clock operations. It’s very easy to participate in this market since accounts can be opened easily. Professional traders participate in the Forex spot market.

Futures
Futures are contracts to buy or sell a certain asset at a specified price on a future date. Forex futures started in 1972 by the Chicago Mercantile Exchange. Since futures contracts are standardized and traded through a centralized exchange, the market is very transparent and well-regulated. This means that price and transaction information are readily available.

Options
An option is a financial instrument that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the option’s expiration date. If a trader sold an option, then they would be obliged to buy or sell an asset at a specific price at the expiration date. Just like futures, options are also traded on an exchange, such as the Chicago Board Options Exchange or the International Securities Exchange. However, the disadvantage in trading forex options is that market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.

Exchange-traded Funds
Exchange-traded funds or ETFs are the newest members of the forex world. An ETF could contain a set of stocks combined with some currencies, allowing the trader to diversify with different assets. These are created by financial institutions and can be traded like stocks through an exchange. Like forex options, the limitation in trading ETFs is that the market isn’t open 24 hours. Also, since ETFs contain stocks, these are subject to trading commissions and other transaction costs.