This lesson explains a few things about types of Forex trades, and if you are interested, then this is worth reading, because you can never tell what you do not know.
Forex Spot trades
A spot Forex trade is an immediate execution of one currency against another at an agreed rate, settlement of which traditionally takes place two business days later. Client Station offers spot trading on streaming real-time prices for over 120 different currency crosses, with deep liquidity on the most liquid currency pairs.
In the Forex trades module, if the Bid/Ask fields are highlighted green, then the platform is delivering a live trade-able price.
To execute the spot trade, simply click the ‘Enable’ button to buy or sell the currency immediately.
Forward Outright Forex Trades
A Forward Outright is a trade that will commence at an agreed upon date (in the future). There is no centralized exchange for Forwards and forward trading is often customized to meet the needs of the buyer and seller.
Forward Out rights are expressed as a price above (premium) or below (discount) the spot rate. The forward Forex price is the sum of the spot price and the margin. This price is a reflection of the Forex rate at the forward date where if the trade were executed at that rate there would be no profit or loss.
Trading on margin
Trading on margin means that an investor can buy and sell assets that represent more value than the capital in their account. Forex trading is typically executed on margin, and the industry practice is to trade on relatively small margin amounts since currency exchange rate fluctuations tend to be less than one or two percent on any given day.
Margin, or leverage, implies that the investor is “gearing” his or her funds. Margin rates of 1% on the first $10,000 in your account and 2% on assets greater than that, are common in online trading. What this means is that a margin of 1.0% enables one to trade up to $1,000,000 even though there is $10,000 in the account.
In terms of leverage this corresponds to 100:1, because 100 times $10,000 is $1,000,000, or put another way, $10,000 is 1.0% of $1,000.000.
Margin is a Powerful Accelerator
Using leverage opens the possibility to generate profits quickly, but increases the risk of rapidly incurring large losses. It is important to review the margin thresholds and limitations in your trading agreement to determine the range of trading activities you can undertake.
Net Equity for Margin
This term is the absolute indicator of the extent of margin capability in your account. If your Margin Required exceeds your Net Equity for Margin you must close or reduce positions, or send additional funds to cover your positions.
Trading on Unrealized Profits
You can trade on unrealized profits in your account. Margin calculations are based on the Net Equity for Margin which includes such unrealized profits and losses as are current in your account.
Margin Call
Traders must maintain the margins listed in their account at all times. If funds in an account fall below the margin requirement, a margin call is issued. A margin call requires the trader to immediately deposit more funds to cover the position or to close the position.
Trade Size
The amount of the trade size is limited by the margin position. For example, a trader with $10,000 in funds and 1% margin, can trade as much as $1,000,000; however taking a single position in this amount would be extremely unwise and generate a margin call if the trade were to tilt slightly.
Majors, Minors and Exotics
Margin rates vary according to the liquidity (available inventory) of different currency crosses. Lower rates apply to majors, higher rates to minors, and then highest margin terms for exotics.
So now you know a little bit about types of Forex trades. Even if you do not know everything, you have done something worthwhile: you have expanded your knowledge.
Today’s lesson was about different types of Forex trades. Thank you for reading.