The purpose of this ebook is to introduce newcomers to the forex
marketplace and CMTRADING. Remember that trading in forex is
inherently risky, and you can lose money as well as make money.
Manage your risk carefully and understand that although education
can help you earn profits, there are never any guarantees.
For more information read the risk warning on our web site:
https://www.cmtrading.com/en-US/risk-disclaimer/
Contents
1. Intro to the Forex Markets
2. Market Mechanics
i. Currency Pairs
ii. Quotes and Prices
iii. Calculating pips
a. Majors against the USD
b. USD as base currency
3. Leverage & Margin
4. Margin Call
5. Rollovers
6. Conclusion
Intro to the Forex Market
The word FOREX is derived from Foreign Exchange; the forex market is the largest financial market
in the world. The market is open 24 hours per day, five days per week, and has an estimated $3
trillion daily turnover.
This tremendous turnover is more than the combined trading activity of the world's main stock
markets on any given day. This makes foreign exchange a very liquid market and a very desirable
focus for financial trading.
Intro to the Forex Market
Unlike many other securities markets—securities are tradable financial instruments—the forex
marketplace does not have a fixed exchange. It is primarily traded through banks, brokers, dealers,
financial institutions, and private individuals. It is known as an Over the Counter (OTC) market.
For the retail client, trades are generally executed over the Internet. The market has generally
required large deposits and high account margins that have precluded smaller investors, but in the
last few years, such investors have been able to access the forex marketplace. With the advent of
the Internet, and with growing competition, it is now easily within the reach of most investors.
Affordable Forex Trading—Where CMTRADING Excels!
Currencies are traded in pairs and exchanged one for the other when traded.
The rates at which they are exchanged are called the exchange rate.
Around 70% of all trades involve the US Dollar. The four next most traded currencies
are the Euro (EUR), Japanese yen (JPY), British pound sterling (GBP), and Swiss franc (CHF).
These four currencies traded against the US Dollar make up the majority of the market
and are called major currencies or the majors.
Prices for forex currency pairs are known as “quotes”. The bid (buy) and ask (sell) are always from
reliable sources. These quotes are normally made up of the top 300 or so large institutions,
ensuring that CMTRADING can always place your order with an institution capable of fulfilling it.
Market Mechanics
i. Currency Pairs
How are forex currency quotes developed? Currencies are traded in pairs, and each member of
the pair is assigned a symbol. For example, the Japanese yen is JPY, the British pound sterling is GBP,
the Euro is EUR, and the US dollar is USD. Expressed as pairs, EUR/USD is the Euro-Dollar pair,
GBP/USD is the pound-dollar pair, and so on.
You will frequently see the USD quoted first, with a some notable exceptions.
The first currency quoted is called the base currency. Have a look at this chart for some examples.
Currency Symbol
EUR/USD
GBP/USD
USD/JPY
USD/CHF
USD/ZAR
AUD/USD
NZD/USD
Currency Pair
Euro / US Dollar
Pound Sterling/ US Dollar
US Dollar / Japanese Yen
US Dollar / Swiss Franc
US Dollar / South African Rand
Australian Dollar / US Dollar
New Zealand Dollar / US Dollar
ii. Quotes and Prices
When you see forex quotes you will actually see two numbers. The first number is called the BID
(sell price) and the second number is called the ASK (buy price).
If we use the EUR/USD as an example you might see 1.29253/1.29279 the first number 1.29253 is
the bid price and is the price traders would pay to sell Euros against the US Dollar.
The second number 1.29279 is the ask price and is the price traders would pay to buy the Euro
against the US Dollar.
ii. Quotes and Prices
You will also notice that there is a difference between the bid and the ask prices. That difference is
called the spread. For the major currencies the spread is normally between 2.5-4 pips
The PIP is the most common fractional increment in currency trading. A pip is the fourth decimal
place of a quotation. If the EUR/USD moves from 1.29253 to 1.29263 that is one pip. The pip
(or POINT, as it is sometimes referred to) is how we will measure profit or loss in forex trading.
Spot Forex is traditionally traded in lots, referred to as contracts. The standard size for a lot is
100,000. In the last few years a mini lot size of 10,000 has been introduced. In fact, there
are now micro lots available, with a position size of only 1000.
iii. Calculating pips
a. Majors against the US Dollar
Let's take a look at some examples, using the standard lot of 100,000.
Due to the small size of pips, it is desirable to trade large amounts of a particular currency in order to
see any significant profit or loss.
Each currency has its own value, so it is necessary to calculate the value of a pip for each particular
currency pair. We also want a constant so we will assume that we want to convert everything to US
Dollars.
1. The majors – EUR/USD, GBP/USD, AUD/USD AND NZD/USD
On all the majors, for a position of 1 lot (100,000 of the base currency), each pip is worth $10.
iii. Calculating pips
a. Majors against the US Dollar
a. EUR/USD
Open position:
Close position:
Buy 1 lot (100,000) EUR/USD at 1.29530
Sell 1 lot (100,000) EUR/USD at 1.29930
1.29930 – 1.29530 = 40 pips
40 pips * $10 = $400 profit
b. GBP/USD
Open position:
Close position:
Buy 5 lots (500,000) GBP/USD at 1.52270
Sell 5 lots (500,000) GBP/USD at 1.52990
1.52990 – 1.52270 = 72 pips
72 pips * $50 = $3600 profit
(Remember: for 1 lot each pip is worth $10, for 5 lots each pip is worth 5 *$10 = $50)
b. US Dollar as the base currency
Let’s now calculate the value of a pip where USD is the base currency (the first quoted currency).
Here we take the last 1 pip and multiply it by the value of the trade.
USD/JPY at an exchange rate of 97.503
(.01/97.503) X $100,000 = $10.26 per pip
Let’s say you buy 1 lot of $100,000 at 97.503. A few hours later the price moves to
99.424 and you decide to close your trade. You ask for a new quote and are quoted
99.424 /99.450.
As you are now closing your trade and you initially bought to enter the trade you must sell in order to
close the trade. So the price to close the trade is 99.424
The difference between 97.503 and 99.424 is 1.921 or 192.1 pips.
Using our formula from before, we now have
(.01/99.424) X $100,000 = $10.06 per pip X 192.1 pips =$1932.53
Leverage and Margin
Leverage allows you to use your money to make larger trades and hopefully realize greater profits.
It increases both your risk and your potential profits.
Leverage actually means the percentage of a trade that your broker will lend you when you open a
trading position. However, unlike regular loans, there is no interest to be paid on leverage loans.
Your leverage depends on the size of the trades you make relative to the amount of money in your
trading account.
Leverage and Margin
CMTRADING allows you to increase your trade size through leverage by using your deposits as
margin. Margin is your protection against trades going against you. Your margin is the minimum
amount of money required in your account.
At CMTRADING, the margin requirement is 0.5%; this means we require 0.5% of your trade size in
order to lend you the amount you need for the trade.
For example, if you are trading with a $100,000 position size, then you will need $500 (0.5%) in your
account in order to make the trade.
Leverage and Margin
The table below shows the minimum amount of money you need to trade a position of $100,000
using various common leverages (remember, the margin is the amount of money you must maintain
in your account).
Leverage does come with greater risk. If you use leverage to make a trade and it moves against you,
your loss is much greater than it would have been if the position had not been leveraged. Leverage
magnifies both profits and losses.
Margin Call
A margin call is made when a trading account no longer has enough money to support the open
trades. This happens when there are too many losing positions and occurs to protect you and the
company from a negative balance—to stop you owing more money than you have in your account.
With CM Trading you will receive a margin call when your account reaches 0.5% of the total of your
open positions
Here is a typical example: You have an account balance of $5,000, and open a position to buy
$500,000 USD/JPY. The minimum amount you need in your account for such a position is:
$500,000 * 0.5% = $2,500
If the USD/JPY goes down, you will lose money on the trade, reducing the equity in your account.
If your account equity goes down from $5,000 to $2,500 you will receive a margin call.
The margin call appears on your trading platform.
At this time you have 3 choices:
Margin Call
1. Do nothing—if USD/JPY continues to go down you could lose all your money
2. Close the position—you may decide to exit the trade
3. Close part of the position—for example, sell $250,000 worth, leaving you with $250,000 open
If you do nothing, at 20% of your margin requirement the platform will automatically close the
position.
In this case, your margin requirement was $2,500. If the position continues to go against you, the
platform will close the trade automatically when you have $500 remaining in your account. The exact
level is not guaranteed as the market can move quickly.
If you close part of the position, your margin requirement will only be on the remaining open
position. In our example, if you close $250,000 and are left with $250,000:
$250,000 * 0.5% = $1,250
This option gives you more opportunity to either continue trading or to cut your losses at an
acceptable level.
Rollover
Rollover (or Swap) is the interest paid or earned for holding a Forex position overnight.
Each currency has an interest rate associated with it. As forex is traded in pairs, every trade involves
not only two different currencies, but also their two different interest rates.
If the interest rate on the currency you bought is higher than the interest rate of the currency you
sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower
than the interest rate on the currency you sold, then you will pay rollover (negative roll).
Rollover can add a significant extra cost or profit to your trade.
The CMTRADING platform automatically calculates and reports all rollover for you.
About CMTRADING
Created by traders for traders, CMTRADING’s founders have combined years of experience to create
a one-stop destination for online trading.
As an online broker, CMTRADING specializes in Forex, Futures, and Commodity trading.
The CMTRADING Advantages:
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FREE webinars and tutorials
Positive slippage and tight spreads
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5 simple platforms
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