Foreign exchange trading differs significantly from securities trading in a number of respects. Our FX information pages provide a precise description of these differences as well as the advantages and disadvantages of FX trading.
Forex (foreign exchange or FX) refers to the trading on international foreign currency markets. It is a global market in which trading is not transacted centrally via certain stock exchanges, but primarily directly between banks via corresponding dealer networks (interbank market).
With a daily turnover of several billion US dollars, the FX market is the world’s largest financial market with the highest liquidity. Around 85 percent of this daily volume relates to the main currencies of the US dollar, euro, Japanese yen, Swiss franc, British pound as well as the Canadian and Australia dollar. For some years now, the internet has also allowed private investors to transact online currency transactions 24 hours a day.
The price and therefore the value of a currency is influenced by carious factors, such as interest rates, inflation and political stability. But, governments and their central banks can also influence the value of a currency, if they enter the market as buyers or seller as part of interventions.
These factors can lead to high volatility on the market. As is also the case for other securities, the largest price movements primarily occur in the case of unexpected events. This includes interest rate reductions or increases by central banks, the outcome of political elections or even armed conflicts.
You can use flatex to trade currencies. For example, our customers have access to the powerful MetaTrader 4 platform.
More information on the trading platform.
Forex transactions are generally transacted OTC (over the counter). This means that these transactions are directly exchanged between two parties and not on a stock exchange. Trading times generally start on Sunday at 11:00 PM (CET) and only end on the following Friday, also at 11:00 PM Forex transactions can therefore take place at almost every time of day and night.
Currencies are essentially always traded in pairs. The first currency in a pair is referred to as the base currency and the second is the price currency. The type of transaction (buy/sell) always relates to the base currency. From a technical perspective, this always involves 2 opposing transactions.
For example, if a buy is transacted for the EURUSD currency pair at a price of 1.12509, this involves buying the EUR and simultaneously selling the USD.
The term pip is often also used in this respect. Pip (percentage in point) is a unit in exchange trading in which the price change of a currency pair is indicated. As a rule, a pip is the smallest possible price change of the 5th digit of the presented price.
For example, this corresponds to a price change from 1.12010 to 1.12020 for the EURUSD currency pair and, for the EURJPY currency pair, a price change from 114.010 to 114.020.
Another important criterion in currency trading is the size of the position. The term lot is often also used in this respect. A lot is the standard volume in foreign exchange trading and consists of 100,000 units of the base currency. For example, trading 1 lot in the EURUSD currency pair corresponds to a position size of EUR 100,000.00 However, smaller positions can generally also be traded, e.g. 0.1 lot. For example, if a position of €10,000.00 is traded in the EURUSD currency pair, the following input must be made for the position size.
|MetaTrader4 = 0.1 (for volume)|
Trading example based on a trading position of €10,000 (0.1 lot) in the EUR USD currency pair
Sale of the EURUSD at a price of 1.12509 (open a position) and sell the EURUSD at a price of 1.12159 (close)
|Sell €10,000 (0.1 Lot) EURUSD at 1.12509||10,000.00||11,250.90|
|Buy €10,000 (0.1 lot) EURUSD at 1.12159||10,000.00||11,215.90|
|This trade would have resulted in a profit of $ 35. The profit always arises in the price currency, i.e. in our example in USD, and is then immediately converted to the account currency (FX accounts created via flatex are generally EUR accounts).|
Direct foreign exchange trading on the FX market provides certain benefits, such as high liquidity, the opportunity to leverage capital and opportunities to transact trades in seconds. However, this type of trading also involves risks due to the leverage involved. A comparison of the benefits and risks provides clarity.
Trade a higher volume with a low capital outlay / leverage effect
In forex trading, a security (margin) is always deposited. This generally amounts to 1% of the position and is automatically blocked from your cash balance when a position is established until you close out your position. The low effective capital outlay (e.g. €100 margin for a position of €10,000) means that you are able to leverage your capital many times over.
Trade live prices in a matter of seconds
In forex trading, you can trade directly on the price of the underlying currency in seconds.
No transaction costs
Forex trading does not involve any transaction costs or order fees for buying and selling.
Virtually unlimited trading times
In forex trading, trading is continuous from Sunday 11:00 PM until Friday 11:00 PM This reduces your risk of price gaps significantly.
The forex market is extremely liquid with billions of dollars in trading every day. This reduces your risk of price gaps significantly.
Leverage can either work for or against you
Margin trading means that you are able to take a forex position that is many times higher than your account balance. For example, you are in a position to open a position for a countervalue of €100,000 and deposit a 1% margin, i.e. € 1,000. If you assume that the traded currency pair moves 5% against your position, this leads to a loss of €5,000, which is automatically debited to you trading account. The size of the position is therefore decisive for you profit or loss in €. In Fast Markets, i.e. market events with rapid, large price movements, in a worst-case scenario this leverage effect can also lead to a total loss.
The leverage effect means that the risks are higher than for the underlying
The price movement of the currency pair that you are currently trading does not necessarily have to be large. But, the effects on your trading account can be many times higher due to the leverage used.
Costs for swaps during the daily rollover
When holding a forex position overnight, a daily interest rate of 3.5% plus/minus the swap rate for the relevant currency pair is charged in line with the terms and conditions. The swap rate depends on the interest rate difference between the involved currency pair and the trading direction (long/short).
You can find details on calculating the swaps in the current list of prices and services.