The major part of speculations is executed on the Forex market.
Being a global market, Forex does not have a settled place of trading and represents a huge army of traders connected by communication channels. Trading is executed by means of phones and computers at the same time all over the world.
Consequently, trading does not stop because there are always people or organizations who want to buy or sell currency. Being an interbank market, Forex is in the lead among all others segments of the currency exchange market by the volume of deals.
Exactly conversion operations (exchange deals of some amount of monetary unit of one country for the currency of another country for the concerted the exchange rate at a certain date) because of its high profitability in comparison with deposit-credit operations (short-term operations of allocation and attracting missing funds in international currencies for a specified time with fixed interest) attract the most important traders.
Almost all the trading instruments are traded on Forex but the most popular are USD, EUR, JPY, GBP and SHF, owing to it they are called “Major currencies”. These currencies compose major currency pairs of the Forex market – EUR/USD, GBP/USD, USD/CHF, USD/JPY.
Exchange rate of one currency against another one on Forex market fixes
as a result of bid and ask. The process of exchange rate fixing is called price
quotations. They can be direct or reversal.
Direct quotation is a price expression of foreign currency through the national one. Most currency exchange rates are a direct quotation of the US Dollar to currencies of different countries.
Example:
USD/RUR – 33.70 means that 1 US Dollar values
or equals to 33.70 Rubles;
USD/UAH – 6.05 means that 1 US Dollar equals to
6 hryvnia 5 kopecks;
USD/CHF – 1.2350 this means that 1 US Dollar
equals 1.2350 Swiss Franc.
Reversal the quotation is a price
expression of national currency
through a foreign one. Historically English and Irish pound, Euro, Australian and
New Zealand dollar and some other currency have reversal quotation.
For instance, quotation EUR/USD – 1.2570 means
that 1 Euro equals 1.2570 US Dollars, and if you see this quotation –
GBP/USD – 1.8420 – then in this case 1 English pound equals 1.8420 US
Dollars, etc.
Moreover, there exists such conception as “Cross
quotation”. It is exchange quotations where USD is not the base currency and not the currency of the pair – EUR/JPY, GBP/CHF, EUR/GBP and others.
There are also quotations by the time of execution, i.e. settlement date. The settlement date is a date when a real exchange of funds by way of bought currency receipt and sold currency delivery to the agent of a deal.
In this case, quotations can be with settlement date “spot” and “forward”. All current market quotations are “spot” prices. While the “spot” quotation maturity date is the second working day after the “operation date”, for instance, if the operation was executed on Tuesday, the settlement date would Thursday, but if the deal was executed on Friday, then settling would be on Tuesday of the next week.
While “forward” quotation settlement date would be in three or more working days after the date of deal execution. We will talk in details about “forward” quotations and deals at the other lessons of this course.
It is important to remember that currency which is the first in pair is called base currency, or quoted currency, value of which is presented, and the second one is evaluation currency, or currency of a deal (in its unit base currency is evaluated).
Let us consider currency pair USD/RUR. USD is the base currency and RUR is the currency of a deal. The value of the US Dollar is
Ruble-denominated.
What is the importance of this case? The thing is that while deals with any currency pair execution, the exact base currency is being sold or bought, it is an asset. That is why if you want to open a EUR/USD order (pic.1), you should understand that you will buy or sell EUR.
Many people think that if I sold Euro versus US Dollar it is the same that if I sold US Dollar versus Euro. In general, it is fair but it can lead to unwanted mistakes while opening or closing position.
 |
| Pic.1 |
You should remember – base currency is being
sold or bought, currency which is first in currency pair.
The notion of the base currency will be useful also while considering such case as price move plotting. Value of 1 unit of the base currency is changing versus evaluated one. For instance, currency pair EUR/USD quotation will be plotted as a value of 1 EUR for some amount of US Dollars.
If the Euro price is rising, i.e. the absolute value of the US Dollar is increasing, then consequently, Euro goes up, or “strengthens” and the chart moves up. If Euro price is falling, US Dollar absolute value is decreasing, it means Euro becomes cheaper and chart moves down.
Considering currency pair USD/CHF then all said above is true for
USD. In this case, US Dollar is rising and the chart is moving up as well if the absolute value of the Swiss Franc is increasing. US Dollar is falling and the chart is
moving down if the absolute value of the Swiss Franc is decreasing.
It means that if the chart moves up – base currency
rises in price, if chart moves down, then base currency becomes cheaper.
 |
Pic. 2 |
 |
| Pic. 3 |
There is an example of the rising and falling of the US
Dollar versus Swiss franc in picture 3. In this case, the base currency is The dollar and the chart reflects the price movement of 1 US Dollar versus the Swiss franc.
It is common to display quotations by five-digit the number on currency market. For instance, EUR/USD - 1,2724, USD/CHF - 1,2045, USD/JPY - 106,74, GBP/USD - 1,8560, etc. The last digit reflects points.
The least possible quotation change is called a change in 1 point. Change of USD/JPY from 106,74 to 106,75, and GBP/USD from 1,8560 to 1,8561 shows that Yen became cheaper versus US Dollar in 1 point, and the pound rose in price 1 point.
The major market makers, as it was said before, are commercial banks, central bank, brokerage companies, private persons, investment foundations and exchange markets, but basic market quotations are formed on basis of demand and supply as a result of major market makers interaction (they are banks, investment foundations, etc.).
Every market maker while every single deal acts as a seller or customer. Banks and financial companies trading market always give a bilateral quotation, the left side of quotation is called bid, and the right one is asking.
If you are going to sell base currency then you act as a seller and would make a deal by bid price; if you decided to buy one, then you are the client and the order is opened at the asking price. The bid price is always less than the asking price because a dealer is obliged to buy base currency at the bid price and sell at the ask price.
The difference between the buying price and selling price is called Spread which is often the main dealer’s basis of income. Let us consider the examples, please pay attention that given below situation is similar to the exchange office.
If you are going to sell traded the currency then it will be bought at the bid price, and you are going to buy then the deal will be executed at the asking price, difference between these prices (Spread) is the income of the exchange office.
Spread – ask – bid
Many Broker Company provides fixed spread by major currency pairs equal to 3 points.
|
|
bid |
ask |
Spread |
|
EUR/USD |
1.2725 |
1.2728 |
0.0003
(3 points) |
|
USD/CHF |
1.2045 |
1.2048 |
0.0003 (3 points) |
|
USD/JPY |
106.75 |
106.78 |
0.03 (3 points) |
|
GBP/USD |
1.8560 |
1.8563 |
0.0003 (3 points) |
By market maker work on Forex market, it means a qualitative or quantitative change of its currency position. Currency position is the correlation of requirements and reliabilities by quoted currencies on market.
It can be opened and closed. Closed currency position supposes the coincidence of requirements and reliabilities by every currency pair. It means that the market maker does not buy or sell anything at the moment.
Opened currency position appears while divergence of requirements and reliabilities by any currency and can be long and short. We are not going to enter into details about the origin of these notions, they arose from the peculiarities of banker’s discount and bank balance sheet, just remember that buying the base currency is a long position and selling it is a short position.
Principal of “buy cheaper, sell higher” underlies. It is usual buying of the base
currency in hope of its rising in price versus evaluated currency. Opening long
position happens while buying, closing – while reversal operation, it's selling.
Initial selling of base currency is on basis of a short position, the idea “sell higher, buy cheaper”. The sequence of processes of buying and selling was changed. If the dealer supposes that quotation of some currency will fall, he/she sells it.
When quotation falls he will buy it
cheaper, deriving profit from the difference between buying and selling price.
Opening of short position happens by selling the currency, closing the buying.
Simplified scheme of short and long orders balance
- Scheme of order balance with an initial opening long position. InstaForex Company has reduced lot volume which equals 10000, it allows trading with a minimal deposit of 1 USD.
|
|
|
bid |
ask |
|
Quotation |
EUR/USD |
1.2725 |
1.2728 |
Opening of long position – buy EUR (volume 10000 Euro) at the price of 1.2728 USD for 1 Euro.
Balance of long position
|
+10000 eur |
-12728
usd |
Closing of long position by selling EUR (volume 10000 Euro) at the price of 1.2750
Balance changes
|
-10000 eur |
+12750
USD |
|
+10000 eur -10000 eur |
-12728
usd +12750 usd |
|
0 |
+22
usd |
2. Scheme of
order balance with an initial opening short position.
|
|
|
bid |
ask |
|
Quotation |
EUR/USD |
1.2725 |
1.2728 |
Opening of short position – sell EUR (volume, 10000 Euro) at the price of 1.2725 USD for 1 Euro.
Balance of short position
|
+10000 eur |
-12728
USD |
|
+10000 eur |
-12728
USD |
Final balance
|
-10000 eur +10000 eur |
+12725
usd -12728 usd |
|
0 |
-3 usd |
- Operations With Trader Platform On The Basis Of Meta Trader 4
- Types of exchange arrangements, rate of exchange