FOREX BASICS

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Contents
Foreword ............................................................................................................................................................ 3
What Is Forex? .................................................................................................................................................. 3
What Is Traded in Forex? ............................................................................................................................... 3
Major Currencies .............................................................................................................................................. 4
Buying and Selling Currency Pairs ............................................................................................................. 5
When you trade in the forex market, you buy or sell in currency pairs. ........................................... 5
Forex Market Size and Liquidity................................................................................................................... 9
The Different Ways to Trade Forex ........................................................................................................... 11
Why Trade Forex: Advantages of Forex Trading .................................................................................. 12
Forex Market Structure................................................................................................................................. 14
Forex Trading Sessions ............................................................................................................................... 16
Know how currencies are traded in the forex market. ......................................................................... 19
How to Read a Forex Quote ........................................................................................................................ 19
Know When to Buy or Sell a Currency Pair ............................................................................................ 20

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Foreword

Trading is an incredibly hard past time. Many people have become rich by trading in the forex market
but, nevertheless many others have lost. Education is key to your development but with so many
websites, videos, and general material it’s hard to know what will help.

It’s always best to stick to the basics, and then move forward to a more advanced level. The eBooks
give you the basic information and look to build on that base knowledge to leave you in the best
position to continue or begin your trading journey. The information provided is not just for beginners
but can be used by traders with different skill sets, even as a simple reminder.

We have taken all reasonable measures to ensure the accuracy of the information contained herein
but we do not accept any liability for any omissions or errors. The content of this E-book and all related
correspondence are neither a solicitation nor an offer to purchase or sell any financial instrument.
Examples are provided for illustrative and educational purposes only and should not be used as
investment advice or strategy.

No representation is being made that any account or trader will or is likely to achieve profits or loses
similar to those discussed in this e-book.

What Is Forex?

Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where
all the world's currencies trade. The forex market is the largest, most liquid market in the world with
an average daily trading volume exceeding $5 trillion. All the world's combined stock markets don't
even come close to this.

The largest stock market in the world, the New York Stock Exchange (NYSE), trades a volume of about
$22.4 billion each day. That huge $5 trillion number covers the entire global foreign exchange market,
BUT retail traders trade the spot market and that’s about $1.8 trillion.

What Is Traded in Forex?

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The simple answer is MONEY.

Think of buying a currency as buying a share in a particular country, kinda like buying stocks of a
company. The price of the currency is usually a direct reflection of the market’s opinion on the current
and future health of its respective economy.
In forex trading, when you buy, say, the Japanese yen, you are basically buying a “share” in the
Japanese economy. You are betting that the Japanese economy is doing well and will even get better
as time goes. Once you sell those “shares” back to the market, hopefully, you will end up with a profit.
In general, the exchange rate of a currency versus other currencies reflects the condition of that
country’s economy, compared to other countries’ economies.

Major Currencies

While there are potentially lots of currencies you can trade, as a new trader, you will probably start
trading with the “major currencies.”

SYMBOL COUNTRY CURRENCY

USD United States Dollar
EUR Eurozone Euro
JPY Japan Yen
GBP Great Britain Pound
CHF Switzerland Franc
CAD Canada Dollar
AUD Australia Dollar

NZD New Zealand Dollar

Currency symbols always have three letters, where the first two letters identify the name of the
country and the third letter identifies the name of that country’s currency.
Take NZD for instance. NZ stands for New Zealand, while D stands for dollar. The currencies included in the
chart above are called the “majors” because they are the most widely traded ones.

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Buying and Selling Currency Pairs

When we buy a currency pair, it means that we are buying the Base Currency by selling the Quote
Currency. Buying EUR/USD means that we are buying euro by selling USD.
When we sell a currency pair, it means that we are selling the Base Currency by buying the Quote
Currency. Selling EUR/USD means that we are selling the euros to buy USD.

When you trade in the forex market, you buy or sell in currency pairs.

Major Currency Pairs

The currency pairs listed below are considered the “majors.” These pairs all contain the U.S. dollar
(USD) on one side and are the most frequently traded.
CURRENCY PAIR COUNTRIES FX GEEK SPEAK
EUR/USD Eurozone / United States “euro dollar”
USD/JPY United States / Japan “dollar yen”
GBP/USD United Kingdom / United States “pound dollar”
USD/CHF United States/ Switzerland “dollar swissy”
USD/CAD United States / Canada “dollar loonie”
AUD/USD Australia / United States “aussie dollar”
NZD/USD New Zealand / United States “kiwi dollar”
Currency pairs that don’t contain the U.S. dollar (USD) are known as cross-currency pairs or simply as
the “crosses.” Major crosses are also known as “minors.” The most actively traded minors are derived
from the three major currencies: EUR, JPY, and GBP.
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Euro Crosses
CURRENCY PAIR COUNTRIES FX GEEK SPEAK
EUR/CHF Eurozone / Switzerland “euro swissy”
EUR/GBP Eurozone / United Kingdom “euro pound”
EUR/CAD Eurozone / Canada “euro loonie”
EUR/AUD Eurozone / Australia “euro aussie”
EUR/NOK Eurozone / Norway “euro nockie”

Yen Crosses
CURRENCY PAIR COUNTRIES FX GEEK SPEAK
EUR/JPY Eurozone / Japan “euro yen” or “yuppy”
GBP/JPY United Kingdom / Japan “pound yen” or “guppy”
CHF/JPY Switzerland / Japan “swissy yen”
CAD/JPY Canada / Japan “loonie yen”
AUD/JPY Australia / Japan “aussie yen”
NZD/JPY New Zealand / Japan “kiwi yen”

Pound Crosses
PAIR COUNTRIES FX GEEK SPEAK
GBP/CHF United Kingdom / Switzerland “pound swissy”
GBP/AUD United Kingdom / Australia “pound aussie”
GBP/CAD United Kingdom / Canada “pound loonie”
GBP/NZD United Kingdom / New Zealand “pound kiwi”

Other Crosses
PAIR COUNTRIES FX GEEK SPEAK
AUD/CHF Australia / Switzerland “aussie swissy”
AUD/CAD Australia / Canada “aussie loonie”

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AUD/NZD Australia / New Zealand “aussie kiwi”

CAD/CHF Canada / Switzerland “loonie swissy”
NZD/CHF New Zealand / Switzerland “kiwi swissy”
NZD/CAD New Zealand / Canada “kiwi loonie”

Exotic Currency Pairs

Exotic currency pairs are made up of one major currency paired with the currency of an emerging
economy, such as Brazil, Mexico or Hungary. The chart below contains a few examples of exotic
currency pairs. These pairs aren’t as heavily traded as the “majors” or “crosses,” so the transaction
costs associated with trading these pairs are usually bigger.
CURRENCY PAIR COUNTRIES FX GEEK SPEAK
USD/HKD United States / Hong Kong
USD/SGD United States / Singapore
USD/ZAR United States / South Africa “dollar rand”
USD/THB United States / Thailand “dollar baht”
USD/MXN United States / Mexico “dollar mex”
USD/DKK United States / Denmark “dollar krone”
USD/SEK United States / Sweden “dollar stockie”
USD/NOK United States / Norway “dollar nockie”
It’s not unusual to see spreads that are two or three times bigger than that of EUR/USD or USD/JPY.

Commodities
For trading newbies out there, you should know that commodity prices can affect currency price
action. In fact, commodity-related currencies like the Aussie, Loonie, and Kiwi often take cues from
commodity prices trends.
COMMODITY DESCRIPTION
USCOCOA US COCOA
SOYBEAN SOYBEAN

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BRENT BRENT OIL FUTURE

COPPER COPPER FUTURE
USOIL West Texas Intermediate Crude Oil Cash
UKCOCOA UK COCOA

Indices
A stock index or stock market index is a measurement of a section of the stock market. It is computed
from the prices of selected stocks. It is a tool used by investors and financial managers to describe the
market, and to compare the return on specific investments.
INDICES DESCRIPTION FX GEEK SPEAK
DAX30 Deutscher Aktien Index “DAX”
DJ30 Dow Jones Industrial Average “Dow”
National Association of Securities Dealers
NASDAQ “NASDAQ”
Automated Quotations
S&P500 Standard & Poor 500 “S&P500”
Average Index of the Japanese stock
Nikkei “Nikkei”
market
FTSE 100 or FTSE 250 depending on the
FTSE “Footsie”
number of companies included in the index

Cryptocurrency pairs
If you trade cryptocurrencies, it’s not enough to pay attention to just BTC/USD (bitcoin).
By only trading bitcoin, you’re missing out on other potential trading opportunities.
You should also be monitoring other cryptocurrencies (also known as “altcoins”) as well.
CRYPTO PAIR DESCRIPTION
BTC/USD Bitcoin vs US Dollar
ETH/USD Etherium vs US Dollar
LTC/USD Litecoin vs US Dollar

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NEO/USD Neo vs US Dollar

DASH/USD Dash vs US Dollar
XMRUSD Monero vs US Dollar

Forex Market Size and Liquidity

The forex market is the biggest financial market in the world. Yet, it is one of the few financial markets
that do not have a physical exchange or location. Forex trades emanate from the network of banks
that act as the liquidity providers, and this aspect of the market is known as the interbank FX market.
The mere fact that the FX market is borderless and is a virtual marketplace has contributed to make
this market the largest in the world. This is because participants in the FX market from the trading
side of things do not have to congregate in a physical location to be able to trade FX or to buy/sell
currencies. A virtual location can therefore absorb millions of people from all over the world in real-
time, connecting with the computers or hand-held devices using the internet. An individual can in a
matter of minutes, transit from someone who knows next to nothing about FX and actually place the
first trade in the market. This has been made possible because of the internet and the placement of
the FX market as a virtual, internet-driven marketplace. The dollar is the most traded currency,
according to the International Monetary fund, followed by euro and yen.

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In fact, according to the International Monetary Fund (IMF), the U.S. dollar comprises roughly 64% of
the world’s official foreign exchange reserves! Because almost every investor, business, and central
bank own it, they pay attention to the U.S. dollar.
There are also other significant reasons why the U.S. dollar plays a central role in the forex market:
• The United States economy is the LARGEST economy in the world.
• The U.S. dollar is the reserve currency of the world.
• The United States has the largest and most liquid financial markets in the world.
• The United States has a stable political system.
• The United States is one of the world’s military superpower.

Speculation in the Forex Market

“Speculation” in Foreign Exchange is an act of buying and selling the foreign currency under the
conditions of uncertainty with a view to earning huge gains.
Often, the speculators buy the currency when it is weak and sells when it is strong. Also, if the spot
rate of the currency is expected to increase in the future, then the speculator buys forward and
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sell “on the spot” the currency bought by him. On the contrary, if the speculator anticipates a fall in
the exchange rate, then he “sells forward” at the current rate and buy the spot when the currency is
needed for the delivery.
The speculation is said to have both the stabilizing and destabilizing impact on the exchange rate.
Such as, if the speculator buys the currency when it is cheap and sells when it is dear, is said to have
a stabilizing effect on the exchange rate. However, there is a controversy with respect to the
stabilizing and destabilizing of exchange rate due to the speculative transactions.
Speculators can provide market liquidity and narrow the bid-ask spread, enabling producers to hedge
price risk efficiently Speculative short-selling may also keep rampant bullishness in check and prevent
the formation of asset price bubbles through betting against successful outcomes.
Mutual funds and hedge funds often engage in speculation in the foreign exchange markets as well
as bond and stock markets.

The Different Ways to Trade Forex

Currency Futures
A currency future, also known as an FX future or a foreign exchange future, is a futures contract to
exchange one currency for another at a specified date in the future at a price (exchange rate) that is
fixed on the purchase date; see Foreign exchange derivative. Typically, one of the currencies is the US
dollar. The price of a future is then in terms of US dollars per unit of other currency. This can be
different from the standard way of quoting in the spot foreign exchange markets. The trade unit of
each contract is then a certain amount of other currency, for instance €125,000. Most contracts have
physical delivery, so for those held at the end of the last trading day, actual payments are made in
each currency. However, most contracts are closed out before that. Investors can close out the
contract at any time prior to the contract's delivery date.

Currency Options

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A currency option is a type of options contract that gives the holder the right, but not the obligation,
to buy or sell a currency pair at a given price before a set time of expiry. To get this right, the holder
of the option pays a premium to the seller (known as the option’s writer).
If a trader “sold” an option, then he or she would be obliged to buy or sell an asset at a specific price
at the expiration date. However, the disadvantage in trading FX options is that market hours are
limited for certain options and the liquidity is not nearly as great as the futures or spot market.

Currency ETFs
Currency ETFs (exchange-traded funds) are designed to track the performance of a single currency
in the foreign exchange market against the US dollar or a basket of currencies. This is accomplished
by multiple methods like cash deposits, short-term debt denominated in a currency, and future or
swap contracts. In the past, these markets were only accessible to experienced traders but the rise of
exchange-traded funds over the past decade has opened the foreign exchange market to all types of
investors.
ETFs are created and managed by financial institutions who buy and hold currencies in a fund. They
then offer shares of the fund to the public on an exchange allowing you to buy and trade these shares
just like stocks. Like currency options, the limitation in trading currency ETFs is that the market isn’t
open 24 hours. Also, ETFs are subject to trading commissions and other transaction costs.

Spot Forex Market

In the spot market, currencies are traded immediately or “on the spot,” using the current market
price. It’s very easy to participate in this market since accounts can be opened with lower funds!
Aside from that, most forex brokers usually provide charts, news, and research for free.

Why Trade Forex: Advantages of Forex Trading

There are many benefits and advantages of trading forex.

• No commissions: Most retail brokers are compensated for their services through something
called the “bid/ask spread“.

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• No middlemen: Spot currency trading eliminates the middlemen and allows you to trade
directly with the market responsible for the pricing on a particular currency pair.
• No fixed lot sizes: In the futures markets, lot or contract sizes are determined by the
exchanges. A standard size contract for silver futures is 5,000 ounces. In spot forex, you
determine your own lot, or position size.
• Low transaction costs: The retail transaction cost (the bid/ask spread) is typically less than 0.1%
under normal market conditions. For larger transactions, the spread could be as low as 0.07%. Of
course, this depends on your leverage.
• A 24-hour market
• No one can corner the market: The foreign exchange market is so huge and has so many participants
that no single entity can control the market price for an extended period of time.
• Leverage: In forex trading, a small deposit can control a much larger total contract
value. Leverage gives the trader the ability to make nice profits but can also lead to large losses
as well. For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar
margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with
$500 dollars, one could trade with $25,000 dollars and so on.
• High Liquidity: Because the forex market is so enormous, it is also extremely liquid. This is an
advantage because it means that under normal market conditions, with a click of a mouse you
can instantaneously buy and sell at will as there will usually be someone in the market willing
to take the other side of your trade. You can even set your online trading platform to
automatically close your position once your desired profit level (a limit order) has been
reached, and/or close a trade if a trade is going against you (a stop loss order).
• Low Barriers to Entry: You would think that getting started as a currency trader would cost a
ton of money. The fact is, when compared to trading stocks, options or futures, it doesn’t.
Online forex brokers offer “mini” and “micro” trading accounts, some with a minimum account
deposit of $25.
• Demo Accounts: Most online forex brokers offer “demo” accounts to practice trading and
build your skills, along with real-time forex news and charting services. Demo accounts are

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very valuable resources for those who are “financially hampered” and would like to hone their
trading skills with “play money” before opening a live trading account and risking real money.

Forex Market Structure

For the sake of comparison, let’s first examine the stock market.
This is how the structure of the stock market looks like:

By its very nature, the stock market tends to be very monopolistic. There is only one entity, one
specialist that controls prices. In the stock market, the Stock Exchanges (SE) are forced to fulfill the
order of their clients. Now, let’s say the number of sellers suddenly exceed the number of buyers.
The SE, which is forced to fulfill the order of its clients, the sellers in this case, is left with a bunch of
stock that he cannot sell-off to the buyer side. In order to prevent this from happening, the specialist
will simply widen the spread or increase the transaction cost to prevent sellers from entering the
market.

Trading Spot FX is Decentralized

A decentralized market is a market structure that consists of a network of various technical devices
that enable investors to create a marketplace without a centralized location. In a decentralized
market, technology provides investors with access to various bid/ask prices and makes it possible for
them to deal directly with other investors/dealers rather than with a given exchange.
The foreign exchange market is an example of a decentralized market because there is no one physical
location where investors go to buy or sell currencies. Forex traders can use the internet to check the
quotes of various currency pairs from different dealers from around the world.
In a basic sense, a decentralized market is where a variety of assets are bought, sold, or traded. Real
estate, for example, is traditionally sold through a decentralized market, wherein buyers and sellers

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complete their transactions without first funneling the process through some sort of clearing house.
Bonds and securitized products can also be procured through decentralized markets.
The advent and rise of blockchain technology and cryptocurrency have created more opportunities
for decentralized markets to operate. Through such technology and mediums, buyers and sellers are
afforded a sense of security and trust in transactions without the need for a central clearinghouse to
monitor and affirm the transactions.

The FX Ladder
The participants in the FX market can be organized into a ladder:

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At the very top of the forex market ladder is the interbank market. Composed of the largest banks in
the world and some smaller banks, the participants of this market trade directly with each other or
electronically. Next on the ladder are the hedge funds, corporations, retail market makers, and retail
ECNs. Since these institutions do not have tight credit relationships with the participants of the
interbank market, they have to do their transactions via commercial banks. This means that their rates
are slightly higher and more expensive than those who are part of the interbank market.

Forex Trading Sessions

Yes, it is true that the forex market is open 24 hours a day, but that doesn’t mean it’s always active
the entire day. You can make money trading when the market moves up, and you can even make
money when the market moves down. BUT you will have a very difficult time trying to make money
when the market doesn’t move at all.

Forex Market Hours

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Before looking at the best times to trade, we must look at what a 24-hour day in the forex world looks
like. The forex market can be broken up into four major trading sessions: the Sydney session,
the Tokyo session, the London session and the New York session.

Below are tables of the open and close times for each session:
Spring/Summer in the U.S. (March/April – October/November)
LOCAL TIME EDT BST (GMT+1)
Sydney Open – 7:00 AM 5:00 PM 10:00 PM
Sydney Close – 4:00 PM 2:00 AM 7:00 AM
Tokyo Open – 9:00 AM 8:00 PM 1:00 AM
Tokyo Close – 6:00 PM 5:00 AM 10:00 AM
London Open – 8:00 AM 3:00 AM 8:00 AM
London Close – 4:00 PM 11:00 AM 4:00 PM
New York Open – 8:00 AM 8:00 AM 1:00 PM
New York Close – 5:00 PM 5:00 PM 10:00 PM

Fall/Winter in the U.S. (October/November – March/April)

LOCAL TIME EST GMT
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Sydney Open – 7:00 AM 3:00 PM 8:00 PM

Sydney Close – 4:00 PM 12:00 AM 5:00 AM
Tokyo Open – 9:00 AM 7:00 PM 12:00 AM
Tokyo Close – 6:00 PM 4:00 AM 9:00 AM
London Open – 8:00 AM 3:00 AM 8:00 AM
London Close – 4:00 PM 11:00 AM 4:00 PM
New York Open – 8:00 AM 8:00 AM 1:00 PM
New York Close – 5:00 PM 5:00 PM 10:00 PM

Open and close times will also vary during the months of October/November and March/April as some
countries (like the United States, England and Australia) shift to/from daylight savings time (DST). This
website will help https://forex.timezoneconverter.com/
Also take notice that in between each forex trading session, there is a period of time where two
sessions are open at the same time. During the summer, from 3:00-4:00 AM ET, for example,
the Tokyo session and London session overlap, and during both summer and winter from 8:00 AM-
12:00 PM ET, the London session and the New York session overlap.
Naturally, these are the busiest times during the trading day because there is more volume when two
markets are open at the same time. Now let’s take a look at the average pip movement of the major
currency pairs during each forex trading session.
PAIR TOKYO LONDON NEW YORK
EUR/USD 76 114 92
GBP/USD 92 127 99
USD/JPY 51 66 59
AUD/USD 77 83 81
NZD/USD 62 72 70
USD/CAD 57 96 96
USD/CHF 67 102 83
EUR/JPY 102 129 107

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GBP/JPY 118 151 132

AUD/JPY 98 107 103
EUR/GBP 78 61 47
EUR/CHF 79 109 84

From the table, you will see that the London session normally provides the most movement.

Know how currencies are traded in the forex market.

The forex market is a global exchange of currencies and currency-backed financial instruments
(contracts to buy or sell currencies at a later date). Participants include everyone from the largest
banks and financial institutions to individual investors. Currencies are traded directly for other
currencies in the market. As a result, currencies are priced in terms of other currencies, like Euros per
US Dollar or Japanese Yen per British Pound Sterling. By effectively seeking price differences and
expected increases or decreases in value, participants can earn (sometimes large) returns on
investment by trading currencies.

How to Read a Forex Quote

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In the forex market, prices are quoted in terms of other currencies. This is because there is no measure
of value that is not another currency. However, the US Dollar is used as a base currency for
determining the values of other currencies.
For example, the price of the USD (EUR) is quoted as (price quote number) GBP/USD.
Currency quotes are listed to four decimal places.
Currency quotes are simple to understand once you know how. For example, the British pound to US
would be quoted as 1.51258 GBP/USD. You should understand this as "you need to spend 1.51258 US
Dollars to buy one British pound."

The first listed currency to the left of the slash (“/”) is known as the base currency (in this example,
the British pound), while the second one on the right is called the counter or quote currency (in this
example, the U.S. dollar).
When buying, the exchange rate tells you how much you have to pay in units of the quote currency
to buy one unit of the base currency. When selling, the exchange rate tells you how many units of
the quote currency you get for selling one unit of the base currency.
In the example above, you will receive 1.51258 U.S. dollars when you sell 1 British pound.
The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that
you are buying the base currency and simultaneously selling the quote currency.
• You would buy the pair if you believe the base currency will appreciate (gain value) relative to
the quote currency.
• You would sell the pair if you think the base currency will depreciate (lose value) relative to
the quote currency.
Know When to Buy or Sell a Currency Pair

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In the following examples, we are going to use fundamental analysis to help us decide whether to buy
or sell a specific currency pair.
When we buy a currency pair, it means that we are buying the Base Currency by selling the Quote
Currency. Buying EUR/USD means that we are buying euro by selling USD. When we sell a currency
pair, it means that we are selling the Base Currency by buying the Quote Currency. Selling EUR/USD
means that we are selling the euros to buy USD.
The ‘basis’ for the buy or sell is the base currency, in our case the EUR. The traveler first sold the
EUR/USD pair – to do this he paid (i.e. sold) the base currency (euros) to get (i.e. to buy) equivalent
dollars. In the second transaction, he bought the EUR/USD pair – to do this he bought his euros back
by paying (i.e. selling) the quote currency i.e. dollars.
Therefore, buying a currency pair just means that we are buying the Base Currency by paying by or
selling the quote currency and Selling a currency pair means that we are paying by (or selling) the base
currency to buy the quote currency. The first currency in the currency pair is the Base currency - just
for the ready reference.
The value of currencies appreciate or depreciate against other currencies because of the gaps in
demand and supply. From longer-term perspective the demand and supply depends on the health of
the economy. If the economy of a country A is doing better than the economy of country B, then the
currency of country A will be more in demand and it's price will go up. Here the fundamental analysis
comes into picture.
In the shorter-term, the prices move because of short-term speculative trading. Here the technical
analysis comes into the picture. You can BUY the currency pair if you think the base currency will
APPRECIATE compared to the quote currency. Similarly, we can SELL the pair if you think that the base
currency will DEPRECIATE compared to the quote currency.
In Forex market you can but a currency pair when you analyze that the price of the base currency
should go up. When the price appreciate, you can sell the currency pair to earn your profits.
On the other hand, if your analysis says that the price of the base currency should go down, then you
sell the pair first (yes, you do not own it as yet) and when the price go down. then you buy it back to
cover your already sold position to earn your profits. When you had sold it without having it, you had

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just taken it on loan or borrowing from your Forex broker and had sold that. And when the price went
down, you buy the currency pair to close your trading position.
You ‘take a position’ in the Forex market when you buy or short-sell a pair.

Margin Trading
Margin trading is a method of trading assets using funds provided by a third party. When compared
to regular trading accounts, margin accounts allow traders to access greater sums of capital, allowing
them to leverage their positions. Essentially, margin trading amplifies trading results so that traders
are able to realize larger profits on successful trades. This ability to expand trading results makes
margin trading especially popular in low-volatility markets, particularly the international Forex
market. Still, margin trading is also used in stock, commodity, and cryptocurrency markets.
In traditional markets, the borrowed funds are usually provided by an investment broker. In
cryptocurrency trading, however, funds are often provided by other traders, who earn interest based
on market demand for margin funds. Although less common, some cryptocurrency exchanges also
provide margin funds to their users.
When a margin trade is initiated, the trader will be required to commit a percentage of the total order
value. This initial investment is known as the margin, and it is closely related to the concept of
leverage. In other words, margin trading accounts are used to create leveraged trading, and the
leverage describes the ratio of borrowed funds to the margin. For example, to open a $100,000 trade
at a leverage of 10:1, a trader would need to commit $10,000 of their capital.
Naturally, different trading platforms and markets offer a distinct set of rules and leverage rates. In
the stock market, for example, 2:1 is a typical ratio, while futures contracts are often traded at a 15:1
leverage. In regards to Forex brokerages, margin trades are frequently leveraged at a 50:1 ratio, but
100:1 and 200:1 are also used in some cases.
Margin trading can be used to open both long and short positions. A long position reflects an
assumption that the price of the asset will go up, while a short position reflects the opposite. While
the margin position is open, the trader’s assets act as collateral for the borrowed funds. This is critical
for traders to understand, as most brokerages reserve the right to force the sale of these assets in
case the market moves against their position (above or below a certain threshold).
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For instance, if a trader opens a long leveraged position, they could be margin called when the price
drops significantly. A margin call occurs when a trader is required to deposit more funds into their
margin account in order to reach the minimum margin trading requirements. If the trader fails to do
so, their holdings are automatically liquidated to cover their losses. Typically, this occurs when the
total value of all of the equities in a margin account, also known as the liquidation margin, drops below
the total margin requirements of that particular exchange or broker.

Rollover
In the forex (FX) market, rollover is the process of extending the settlement date of an open position.
In most currency trades, a trader is required to take delivery of the currency two days after the
transaction date. However, by rolling over the position – simultaneously closing the existing position
at the daily close rate and re-entering at the new opening rate the next trading day – the trader
artificially extends the settlement period by one day.
Often referred to as tomorrow next, rollover is useful in FX because many traders have no intention
of taking delivery of the currency they buy; rather, they want to profit from changes in the exchange
rates. Since every forex trade involves borrowing one country's currency to buy another, receiving
and paying interest is a regular occurrence. At the close of every trading day, a trader who took a long
position in a high-yielding currency relative to the currency that they borrowed will receive an amount
of interest in their account.
Conversely, a trader will need to pay interest if the currency they borrowed has a higher interest rate
relative to the currency that they purchased. Traders who do not want to collect or pay interest should
close out of their positions by 5 P.M. Eastern.
Note that interest received or paid by a currency trader in the course of these forex trades is regarded
by the IRS as ordinary interest income or expense. For tax purposes, the currency trader should keep
track of interest received or paid, separate from regular trading gains and losses.

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