Forex Basics

What is Forex?

Forex, or Foreign Exchange, is the simultaneous exchange of one country's currency for that of another. FX provides foreign exchange for the purpose of investor speculation. The investor wishes to purchase or sell one currency for another with the hope of making a profit when the value of the currencies changes in favor of the investor, whether from market news or events that take place in the world. This market of exchange has more daily volume, both buyers and sellers, than any other in the world. Taking place in the major financial institutions across the globe, the forex market is open 24-hours a day.

Buying / Selling

Placing a trade in the forex market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless. Below is a step-by-step guide of what happens when a trade is placed.

In this market you may buy or sell currencies. The objective is to earn a profit from your position. If you have bought a currency, for example, and the price appreciates in value, then you will earn a profit by closing your position. When you close your position, sell the currency back in order to lock in the profit, you are in actuality buying the counter currency in the pair. By trading currency pairs, one currency valued against another, a rate of worth has been established. After all, a country's currency has value only relative to the currency of another country.

Just like in 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.

The Costs of Trading

You will notice that there are two rates for all currency pairs: the bid, or the rate at which traders can sell, and the ask, or the rate at which traders can buy. There is a small difference between the two. This difference, known as the spread, defines the cost of the trade. Spreads are a part of all markets, but are typically "hidden" in the broker-based equities and futures markets. When trading directly with GainFX, there are no commissions charges for trading.

Leverage

Leverage is the process in which a trader can take a market position much larger than the value of the trader's account. RefcoFX enables you to take positions up to 100 times the value of your account. 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), RefcoFX will close all open positions in the account.

Rollover

For positions open at 5pm EST there is a daily rollover (interest payment) you either pay or earn on 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 at 5pm EST, the established end of the market day.