Trading for Beginners
What is FX?
Forex, also known as foreign exchange, FX or currency trading, refers to the decentralized, global, market for trading currencies. The forex market is the largest, most liquid market in the world. There is no central exchange as it trades over the counter.
SP Markets lets you trade FX (as well as stock market indices, metals and commodities) on its SP Pro platform. You trade by entering into contracts for difference with us (a type of derivative), which is a contract that provides for the seller (SP Markets) to pay the buyer (you) the difference between the current value of an underlying asset (like currencies or metals) at a particular time in the future (if the difference is negative the buyer pays the difference to the seller). That is, the value of the contract is ultimately determined by reference to the underlying asset- there is no delivery of physical goods or securities.
What is the exchange rate?
In forex the exchange rate is the price that one currency can be exchanged for another. Unlike some other markets, there is no centralized depository or exchange where forex transactions are conducted. Instead, these transactions are conducted by several market participants in several locations. It is rare that any two currencies will maintain the same relative value for more than a short period of time. In forex, the exchange rate between two currencies is constantly changing.
Why does exchange rates change?
Currencies trade on an open market, just like stocks, bonds, cars and many other goods and services. A currency's value fluctuates as its supply and demand fluctuate. Fluctuations can be caused by an increase or decrease in supply or a decrease in demand for a currency. An increase in supply or an decrease in demand can cause the value of a currency to fall. An decrease in supply or an increase in demand can cause the value of a currency to rise.
A benefit to forex trading through SP Markets is that you can buy or sell any major currency pair, at any time subject to available liquidity and market hours. So if you think the Eurozone economy is heading into recession you may decide to sell the euro and buy the dollar (sell EUR/USD). If you think the price of gold is going to go up, and based on historical patterns, you think the value of gold affects the value of the Australian dollar, you might decide to buy the New Zealand dollar and sell the U.S. dollar (buy NZD/USD).
This means can make (or lose) money when the market is trending up or down.
What is Margin FX transaction?
The foreign exchange market (forex, FX, or currency market) is a global
decentralized market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. A Margin FX Transaction is a non-deliverable, leveraged, rolling foreign exchange transaction in relation to an agreed Currency Pair. Margin FX Transactions non-deliverable. they are cash-adjusted or cash-settled. In other words, there is no physical payment of the principal amount of the foreign currencies subject of the Margin FX Transaction. Margin FX Transactions are over-the-counter ("OTC”) transactions.
What is Leverage?
A key feature of derivatives like CFDs is that you can leverage your trading positions to gain greater exposure to the price of an underlying asset than you would obtain by trading in the underlying asset directly. That is, the amount you deposit to trade (the margin) is less than the value of the CFD transaction you enter into. This allows you to significantly increase the potential returns (and also potential losses)
[If the products are CFDs then this is not relevant] What is Leverage?
Leverage of 50:1 allows you to trade with $1,000 in the market by setting aside approximately $20 as a deposit. This means that you can take advantage of even the smallest movements in currencies by controlling more money in the market than you have in your account. On the other hand, leverage can significantly increase your losses. Trading foreign exchange with any level of leverage may not be suitable for all investors.
What is Margin？
To trade you have to provide us with initial margin, that is you need to keep a specified minimum amount of funds in your trading account with us. Margin can be thought of as a good faith deposit required to maintain open positions. Where you have open CFD positions you may be required to provide additional margin. This is a "margin call”.
What are long and short positions？
A key feature of CFDs is that you can take both long and short positions. That allows you to potentially profit from either a rising or falling market in the underlying assets (but you can also make a loss in both a rising market and a falling market). If you take a long position, you profit from an increase in the price of the underlying asset (you make a loss if the price decreases). However, if you take a short position, you profit from a fall in the price of the underlying asset (and make a loss if the price increases).
Features and benefits of trading with SP Markets
As transactions are leveraged, when you trade with us you get exposure to movements in the price of the underlying currencies (or other assets) without having to pay the full price (i.e. the amount that you would have to pay if you were to physically hold the assets). You can effectively take a position with the same result as purchasing or selling an asset for less than the price of the equivalent physical transaction and still potentially benefit from a price move. Leverage is the ability to make a higher return (or higher loss) for a smaller initial payment.
Trading can be used as a risk management tool to help you hedge (protect) your exposure to a change in value of underlying assets.
The flexibility of entering and exiting various trades in forex and other underlying assets with us enables you to keep an eye on market movements and to trade accordingly. You are able to develop strategies regardless of the direction of currency markets. You can create both long positions (where you buy a the underlying asset) and short positions (where you sell the underlying asset)
You can hold open positions in a wide range of underlying assets, which potentially allows you to diversify your investment risks by having exposure to multiple asset classes. However, this cannot be used remove the risk of loss.
Trading does not require a rising market to make money. There is the potential for profit and loss in both rising and falling currency markets depending on the strategy you use. Markets are affected by many changes and influences, which cause what is commonly referred to as market volatility.
If you are considering entering into transactions with us, you should be a person who:
has a tolerance for a high level of risk; and
fully understands the risks involved in trading derivatives; and
is able to actively and continually monitor your open positions and meet your obligations to SP Markets.
What are the potential profits and losses that I can make from trading on our platform?
Transactions can be used for hedging, strategic trading or diversification and create the potential to make a profit and loss in both rising and falling markets, depending on the strategy that you apply.
In addition to the loss or gain resulting from changes in the value of the underlying assets, you may also incur/receive interest on the market value of your open position, if you hold your positions overnight. This is termed as a ‘rollover fee’. The amount of interest differs depending on the type, value or price of the derivative and the type of position. Interest can either be a credit or debit. If you pay interest this will reduce the value of your open position, and may result in a reduced profit (or increased loss).
What are the risks of trading?
Trading derivatives can have significant risks and consequences. Your level of exposure will depend on a number of factors, including (but not limited to):
1. Your trading strategy: You may misinterpret market conditions, make a mistake when entering into a transaction or fail to act promptly in relation to entering, maintaining or closing a position.
2. Amplified losses due to leverage: By taking leveraged positions you can amplify your potential profits but also your potential losses. You risk the value of the loses exceeding your margin and your losses may be unlimited.
3. Exchange rates: Realised profit or loss of your positions with SP Markets will be converted into the deposit currency (usually USD) in real time. This creates exchange rate risk, that is differences in the relevant exchange rate between the time you entered into the position, and when the position is closed, may give rise to a foreign exchange loss (or profit).
4. Financial market conditions: If there is an adverse movement in the price of the underlying asset from your perspective, the value of the particular position you hold will also drop (you can also make gains if the price moves in the opposite direction). Significant changes to market conditions may mean you cannot close your positions in time to avoid significant losses or to realise any gains, including because of rapid changes in the value, price or level of the underlying asset or because of inadequate market liquidity.
5. Credit Risk: Since you are dealing with SP Markets as counterparty, you are exposed to the financial and business risks, including the credit risk associated with trading with SP Markets.
How to Trade with SP Markets
Opportunities: What's your opinion?
Just like shares, you can trade based on what you think its value is (or where it's heading). But the big difference with derivatives is that you can trade up or down easily. If you think an underlying asset will increase in value, you can buy it. If you think it will decrease, you can sell it.
Maybe you hear on the news that the GBP will likely strengthen against the USD. You therefore buy (go long) of GBP/USD. The next day, the price of GBP/USD has increased and you choose to close out your position and make a profit. The more the GBP will strengthen against the USD, the higher your profits. If the GBP decreases in value while you have your buy position open, then your losses increase and you may want to get out of the trade.
Making a trade: how to buy and sell currency
You have an idea. Now what? Open our free demo platform and practice trading.
All trades in connection with forex involve two currencies because you're assessing the value of a currency against another. Consider the EUR/USD, the most-traded currency pair in the world. EUR, the first currency in the pair, is the "base”, and USD, the second, is the quote”. When you see a price quoted on your platform, that price is how much one euro is worth in US dollars. You always see two prices because one is the buying price and the other one is the selling price. The difference between the two is the spread. When you choose to buy or sell, you are buying or selling the first currency in the pair.
Let's say you think the euro will decrease in value against the US dollar. Your pair is EUR/USD. Since the euro is the first, if you think it will go down, you sell EUR/USD. If you think the euro will drop in value against the US dollar, you buy EUR/USD.
Trading on margin
Prices are quoted to the hundredths of cents, so how can you make a significant return when you trade? The answer is leverage.
When you trade, you trade with leverage. To trade with leverage, you simply set aside the required margin for your trading size. If you're trading 50:1 leverage, for example, you can trade $1,000 in the market while only setting aside $20 in margin in your trading account. This gives you much more exposure, while keeping your capital investment down.
However, leverage doesn't just increase your profit potential, it can also increase your losses, which can exceed your deposited margin and may be unlimited. When you're new to trading derivativeyou should always start trading small with lower leverage ratios, until you feel comfortable with the market.
Why Trade with SP Markets?
Because we're an established trading platform in NZ, When you trade with SPL you gain access to benefits of a top broker including:
· Excellent and responsive customer service.
· A wide variety of popular trading options, including forex, metals, commodities and stock indices. You can choose your own portfolio based on your investment preferences and capital ratio.
· Our intuitive trading platform, based on the world's popular trading software MT4, provides a variety of functions to enhance your trading experience.
· Flexible leverage ratios that can meet the risk appetite of different customers.
· Free Premier Education with on-demand lessons, webinars and real-time instruction, you get the trading edge you need.