What is Forex ?
Forex is the first syllable of Foreign and Exchange and the market in which foreign currencies are traded. The market has 5.5 million daily transaction volume. Participants of the market are commercial banks, Central Banks, Portfolio Management firms, insurance companies, hedge funds and individual investors. There is no centralization in the market and participant can trade for 24 hours.
Development of Forex in the World
It enlarged product varieties and renewed to encourage investors. The most important advantage of Forex is various leverage ratios. Leverage is determined depending on different currencies and provides opportunity to investors to execute larger transaction with smaller amount of pledge.
Development of Forex in Turkey
Forex market in Turkey becomes legalized with rule made by Board of Capital Markets in 2011. Especially, after 2011, Board of Capital Markets made some regulations to protect investors in Forex market.
Trading Volume in Forex Market
According to data in February, 2016, Forex market has US$4.9 trillion trading volume. New York Stock Exchange, the largest stock exchange in the world, has average US$29-30bn daily trading volume. As a result, global trading volume equals to 170 times of the volume in New York Stock Exchange.
Trading volume of Turkish Forex market has steady increment and reached to TRY17 trillion annual trading volume in 2015. It is equal to US$5.5 trillion and it is approximately equal to global trading volume. It implies that Forex becomes more common investment instrument in coming years.
Advantages of Forex Market
Leverage : Investors can carry out larger sizeable transaction with a small fund. They can make more profit with small amount of pledge.
Bilateral Market :Investors can execute buy and sell transaction with this function to get profit.
High Liquidity : Investors can carry out transactions during 5 days and 24 hours. Also, they can get profit in the short term with rapid price movements. Although investors can get loss until the level they have fund, there is no limit for profit. Thanks to limit, it prevents manipulative and high liquidity transactions.
Advantage For Instrument Diversification : Many types of products are added in the market with development of the market, such as, precious metals, energy sources, commodities, stocks and products based on indices.
Low transaction cost : Transaction cost is competitive in Forex market and lower compared to investment amount.
Trading is made in Forex market with 2 main purposes;
Transactions with speculative purposes:It is type of transaction that is made by investors with purposes of getting profit with decrease or increase in prices. In Turkey and World, transactions are executed with speculative purpose, generally.
Transaction to hedge positions:; The purpose is suitable generally, for corporate investors. Investors and institutions with high currency risk can reduce their risk minimum level with 1-2% pledge of their current positions. This function is not well-known, but it prevents huge amount of losses.
Trading in Forex Market
First of all, investors have to sign an agreement with institution which has transaction brokerage licence. Demo account is opened with the agreement. Then, investors have to open and close 50 positions without any risk during 6 days in demo account. Last regulation made by Board of Capital Markets, it aims investors to get practical information.
Leverage determines the amount of pledge has to be invested. High leverage means using lower amount of pledge compared to position size. Different leverage ratio can be implemented in different countries. More than 1 position with high leverage carries more risk for investors.Fort hat reason, leverage ratio in Turkey was regulated by Capital Market Board of Turkey as of 10 February 2017. With regulation, maximum leverage ratio decreased to 10:1 from 100:1 and minimum TRY50,000 or equivalent exchange must be invested as initial margin to start execute transactions.
Risk in Forex Market
Forex market includes risk due to high volatility and leverage advantage. Also, it causes investors to loss their pledge in short term in the case of opening large sizeable position with low margin. Principle for Forex market is “high risk = high return” as other markets
On the other hand, risk can be managed. Forex market is like driving a car. If seal belt is not put, limit is gone out and traffic lights are not followed, while people are driving cars, it can cause vital results. Forex market is the same. If stop loss level is not put, high risk is carried by using whole amount of margin and level to take profit is not determined, it can cause huge amount of losses. Specific strategies can be determined by participating training made by institutions..
Opening Position in Forex Market
Some terms should be known to execute transactions in Forex market.
Parity: : It is currency pair symbol of a currency in terms of another currency. Symbol of a currency consists of abridgment of a country’s name and currency, such as USD (United States – US, Dollar – D). Demonstration of value of a currency against another one is parity, such as, EURUSD, AUDUSD.
Lot:: It shows trading volume. 1 lot transaction differ from size of different contract. For example, 1 lot for parities is equal to 100,000 units. 1 lot EURUSD buy order means buy 100,000 Euro.
Margin: : It means the amount of pledge is used for position. Amount of pledge depends on size of position and leverage ratio. Calculation of margin is based on base currency. That means calculation is made on EUR for EURUSD.
Spread:: It is the difference between bid and ask. Calculation for profit or loss is made from sell price when they open buy position. Moreover, calculation for profit or loss is made from buy price when they open sell position.
Tick ve Pip:: Fifth digit is named as tick. 10 ticks is equal to 1 bip. Bip is forth digit of the price after comma
As an example,
According to the example above, sell price is 1.11829 and buy price is 1.11836 for EURUSD. 7 ticks difference between buy and sell price equal to spread.
In this example, 1 lot transaction is equal to EUR100,000. In the case of 1:100 leverage, amount of pledge is EUR1,000. Also, investors can carry out transactions with micro lots that are equal to 0.01 lot. In the case of execution of transaction with 0,01 lot, the amount of pledge is EUR10.
In Forex market, calculation made for profit or loss is based on second currency of the parity.
In the example, if 1 lot EURUSD is bought from 1.11836 and then, increases to 1.12000, “1.12000-1.11836 = 0.00164” tick profit is generated. 1 lot transaction for 1 tick in EURUSD is equal to US$1 profit. Therefore, investor generated US$164 profit from the transaction.
Trading Hours in Forex market
Investors can trade for 5 days and 24 hours. The market opens on Sunday night with the opening of Australian market and closes on Friday night with the closing of American market.
Types Of Orders In Forex Market
Investors can give standing orders when they think that specific points or levels are important.
There are 7 types of orders.
Market Order : It is an immediate type of order and executed with market price.
Buy Limit Order : It is a type of standing order to buy from lower price when current market price drops below determinated price. It can be used if the investor thinks that decline will continue and then, it will start rising.
Sell Limit Order : It is a type of standing order to sell from higher price when current market price rise above determinated price. It can be used if the investor thinks that increasing will continue and then, it will start declining.
Buy Stop Order : It is a type of standing order to buy from higher price when current market price rise above determinated price. It can be used if the investor thinks that price will increase and rising will continue rapidly in the case of breaking resistance level.
Sell Stop Order : It is a type of standing order to sell from lower price when current market price drops below determinated price. It can be used if the investor thinks price will decrease and falling will continue rapidly in the case of breaking support level.
Take Profit : It is a type of standing order in order to close open position and take profit from desired price. In buy order, it is put on the market price and in sell order, it is put under the market price.
Stop Loss : It is a type of standing order in order to close open position, hedge the position and stop loss from desired price. In buy order, it is put under the market price and in sell order, it is put on the market price.
Basic Concepts Of Forex Market :
Parity : It is currency pair symbol of a currency in terms of another currency Symbol of a currency consists of abridgment of a country’s name and currency, such as USD (United States – US, Dollar – D). Demonstration of value of a currency against another one is parity, such as, EURUSD, AUDUSD.
Spread : It is the difference between bid and ask. It is an income item for a company.
Bip : It is forth digit of the price after comma. Fifth digit is named as tick. 10 ticks is equal to 1 bip. 1 tick shows the smallest price movement.
Base Currency : It is first currency in the parity. Euro is the base currency for EURUSD. Calculation of margin is based on base currency.
Contrary Currency : It is second currency in the parity. Dollar is the base currency for EURUSD. Calculation of profit and loss is based on contrary currency.
Long Position : It means transaction to buy.
Short Position : It means transaction to sell.
Margin : It is necessary pledge for trading. Calculation of margin is based on base currency. Investors have to use pledge (Price x Contract size x Lot) to carry out a transaction. They have to use (1.1300 x 100,000 x 1)/10 = 11.300 USD for 1 lot EURUSD order from 1.1300.
Free Margin : It shows that investors can use after open positions are closed. It is equal to subtraction of the margin from investors’ asset. If there is no open position, free margin equals to their assets.
Scalping : It means trading with small price movements and taking profit in the short term.
Stop Out: When your margin level drops below the level determinated by the institution, automatically, it starts closing from your transaction with biggest loss until margin level reach the desired level at least or above. Stop out level in Alan Invest is 10%.
Swap : It is the carrying cost for a night. If the investor does not close open position at the end of the day, swap is applied in positive or negative. Swap in Forex market is interest rate difference between currencies.
Slippage : Fast price movements can be seen in Forex market due to its features; high liquidity and open for 5 days and 24 hours. Slippage means execution transaction with lower or higher prices than desired price.