As with all markets, there are two prices for every currency pair. The difference between these two prices is the spread, or the cost of the trade. In this example, the spread is three pips. On the 10k position, a pip on the EUR/USD currency pair is worth $1.

Margin / Leverage

FX accounts are margined: a trader can hold a market position much larger than the value of the trader’s account value. The online trading platform which FOREXYARD offers has margin management capabilities, which allow lenient margin requirement of up to 1/2%. However, we do not recommend using leverage of more than 10 times your account value. Using leverage exaggerates both gains and losses. Even when market conditions are relatively calm, using leverage can generate large gains or losses. In the case where a trader surpasses the maximum leverage allowed (which can happen when account equity shrinks as a result of trading losses), the trading system will close all open positions in the account. This prevents client’s accounts from falling into a negative balance, even in a highly volatile, fast moving market.
Example of How Margin Works

Since the trader opened 1 lot of 10k EUR/USD, his margin requirement or Used Margin is $50. Usable Margin is the funds available to open new positions or sustain trading losses. If the equity (the value of his account) falls below 20% of his Used Margin due to trading losses, his position will automatically be closed. As a result, the trader can never lose more than he/she deposits.
Account Balance Equity Day P/L Usd Mr Usbl Mr Usbl Mr% Gross P/L MC
008771 50.01000 50.01000 10.00 1000.00 50,010.00 98.00 0.00 N
50.01000 50.01000 10.00 1000.00 50,010.00 98.00 0.00 N

Rollover

In the spot forex market, trades must be settled in two business days. If a trader sells 100,000 Euros on Tuesday, the trader must deliver 100,000 Euros on Thursday, unless the position is rolled over. As a service to our traders, FOREXYARD automatically rolls over all open positions to the next settlement date at 5:00 pm New York time. Rollover involves exchanging the position being held for a position expiring the following settlement date. The positions being exchanged are usually not valued at the same price. The difference in amount varies greatly based on the currency pair, the interest rate differential between the two currencies, and fluctuates day to day with the movement of prices.

For positions open at 5.00 pm EST there is a daily rollover (interest payment) you pay for an open position depending on your established margin level and position in the market. If you do not want to earn or pay interest on your positions, simply make sure they are closed by 5.00 pm EST, the established end of the market day.

Getting Started

With no commitment or cost, you can open a Virtual Trading Account. The account has the full capabilities of a “real” account including live market rates, access to real-time market analysis, and the ability to execute trades off streaming prices. The virtual account (or Demo Account) gives you the ability to learn about the forex markets and test your trading skills without any risk.
How to Trade Your Demo

Use this time to make a plan and develop your strategies.

* Choose the right currency pair. Find out based on your risk parameters, which currency is best suited for your trading style. Some may be too volatile and some too slow so decide which currency pair is most appropriate for your strategy and time frame.
* Decide on how long you plan to stay in a trade. If you are an inter-day trader, what is the average time of your trade? – a few minutes, a couple of hours, a full day, or swing trade (couple of days to a week).
* Before you enter a trade you should also have clear exit plan. Place your stops and limits accordingly.
* Know how much you are willing to risk and how much you are looking to gain.
* Keep track of important news and technical levels, which may be tested within your time frame.

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Differences Between Forex and Equities
A major difference between the forex and equities markets is the number of traded instruments: the forex market has very few compared to the thousands found in the equities market. The majority of forex traders focus their efforts on seven different currency pairs: the four majors, which include (EUR/USD, USD/JPY, GBP/USD, USD/CHF); and the three commodity pairs (USD/CAD, AUD/USD, NZD/USD). All other pairs are just different combinations of the same currencies, otherwise known as cross currencies. This makes currency trading easier to follow because rather than having to cherry-pick between 10,000 stocks to find the best value, all that FX traders need to do is “keep up” on the economic and political news of eight countries.

The equity markets often can hit a lull, resulting in shrinking volumes and activity. As a result, it may be hard to open and close positions when desired. Furthermore, in a declining market, it is only with extreme ingenuity that an equities investor can make a profit. It is difficult to short-sell in the U.S. equities market because of strict rules and regulations regarding the process. On the other hand, forex offers the opportunity to profit in both rising and declining markets because with each trade, you are buying and selling simultaneously, and short-selling is, therefore, inherent in every transaction. In addition, since the forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position – as they are in the equities market.

Due to the extreme liquidity of the forex market, margins are low and leverage is high. It just is not possible to find such low margin rates in the equities markets; most margin traders in the equities markets need at least 50% of the value of the investment available as margin, whereas forex traders need as little as 1%. Furthermore, commissions in the equities market are much higher than in the forex market. Traditional brokers ask for commission fees on top of the spread, plus the fees that have to be paid to the exchange. Spot forex brokers take only the spread as their fee for the transaction. (For a more in-depth introduction to currency trading, see Getting Started in Forex and A Primer On The Forex Market.)

By now you should have a basic understanding of what the forex market is and how it works. In the next section, we’ll examine the evolution of the current foreign exchange system.

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