Forex Trading

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1. What is Forex Trading?

Forex Trading, also known as Margin Foreign Exchange, FX or Margin FX is an agreement between you and your Forex Broker to pay the other the difference arising from movements in the value of an Underlying Instrument, without either party actually owning the Underlying Instrument.

Forex is an Over The Counter (OTC) derivative product. This means that Margin FX Contracts are created and traded off-market between parties (for example, between you and your FX Broker) rather than being traded on an exchange, such as a stock exchange or futures exchange.

The Underlying Instrument for a Margin FX Transaction is the Exchange Rate. The Exchange Rate can be either the price of one currency expressed in the terms of another currency (FX Transactions) or the price of a precious metal expressed in a specified currency or precious metal (Metal Transactions).

All Margin FX Transactions remain open until they are Closed Out. This occurs where you enter into an equal and opposite Transaction and the two positions are offset against each other.

2. Key Points of Forex Trading

Margin FX Transactions can either be FX Transactions or Metal Transactions.




FX Transactions are available in most widely traded currencies.



In order to enter into an FX Transaction, you must select two currencies known as a currency pair.



The Underlying Instrument for an FX Transaction is the Exchange Rate. The Exchange Rate is the price of one currency in terms of another currency (called a Currency Pair). For example, the Exchange Rate might be the price of the New Zealand dollar (NZD) in terms of the United States dollar (USD). If the current Exchange Rate for the NZD against the USD (NZD/USD) is 0.7000, this means that one NZD equates to, or can be exchanged for, USD 0.7000 or 70 US cents. This example is included for illustrative purposes only, and is not indicative of actual exchange rates or values.



All FX quotations are made up of two currencies; the Base Currency and the Terms Currency. The Base Currency can be identified as being the first currency in the Currency Pair. The second currency in your Currency Pair is referred to as your Terms Currency. So, for an FX Transaction where the Underlying Exchange Rate is NZD/USD, NZD will be the Base Currency and USD will be the Terms Currency.



Unlike contracts traded on an exchange, OTC products are not standardised. The terms of an FX Transaction are individually tailored to the particular requirements of the parties involved in the contract i.e. your broker and you.

The terms involved in the negotiation of FX Transactions are:

  1. the Currency Pair;
  2. the amount of the Base Currency to which the Transaction relates (called the Notional Value);
  3. the Exchange Rate at which such currencies are to be exchanged; and
  4. the Value Date for the Transaction.



FX Transactions are negotiated and agreed with your broker acting as counterparty (and principal) in its dealings with you. These are transactions between you and the broker and can only be entered into with your broker and Closed Out with the same broker. It is not possible to Close Out the FX Transactions with any other party. FX Transactions are subject to Margin Requirements and “marked to market” on a real time basis.


Metal Transactions are the same as FX Transactions except in the following instances:



Under Metal Transactions you make a profit or incur a loss if the value of a precious metal (limited to gold or silver) appreciates or depreciates (depending on the direction of the trade) when compared against a currency or precious metal (called a Metal Pair). For example, the Exchange Rate might be the price of Spot Gold (XAU) in terms of USD. If the current Exchange Rate for Spot Gold against the USD (XAU/USD) is 1300.00, this means that 1 ounce of Spot Gold equates to, or can be exchanged for, USD 1,300.00. This example is included for illustrative purposes only, and is not indicative of actual exchange rates or values.



The Base Currency for Metal Transactions will always be either gold or silver. Most widely traded currencies are available to make up the Terms Currency of the Metal Pair along with either metal or gold.

3. Take Both Long and Short Positions

Forex while traded in pairs you can take either direction when entering a transaction or trade.

Of the two currencies that make up the Currency Pair (for FX Transactions) or the precious metal(s) and/ or the currency that make up the Metal Pair (for Metal Transactions), you must select the currency or precious metal that you think will appreciate relative to the other (this is always referred to as the Long Currency) and the currency or metal you think will depreciate relative to the other (this is always referred to as the Short Currency). If the value of the Long Currency appreciates relative to the value of the Short Currency then the value of that Transaction will increase and you may profit. If the value of the Short Currency appreciates relative to the value of the Long Currency then the value of the Transaction will decrease and you will make a loss.

4. Calculating Profits and/or Losses:

The gross profits or losses on a Margin FX Transaction will be equal to the difference between the value of the Base Currency multiplied by Exchange Rate at which the Transaction was entered into (this gives you the Terms Currency) and the value of the Base Currency multiplied by Exchange Rate at which the Transaction is Closed Out (this gives you the Terms Currency).

The difference between the two amounts will either be the gross profit (if your Long Currency appreciates relative to your Short Currency) or loss (if your Long Currency depreciates relative to your Short Currency) on the trade.

If the Underlying Exchange Rate moves in your favour (i.e. your Long Currency appreciates relative to your Short Currency) the amount determined by this formula will be greater than zero and your Forex Broker will credit this amount (less any fees, charges, commission and spreads) to your Trading Account. By contrast, if the Underlying Exchange Rate moves against you (i.e. your Short Currency appreciated relative to your Long Currency) the amount determined by this formula will be less than zero and Forex Broker will debit that amount (as well as any fees, charges, commission and spreads) from your Trading Account.


This example is included for illustrative purposes only, and is not indicative of actual exchange rates or values.

Assume your Trading Account Currency is NZD. You enter into a Margin FX Transaction by purchasing 100,000 NZD/USD (i.e. you enter into a “long” FX Transaction, where NZD is your Long Currency and USD is your Short Currency) and the Exchange Rate at which you enter into the FX Transaction is 0.7200. Later that day you Close Out the Margin FX Transaction by “selling” (or entering into a “short” FX Transaction, i.e. where NZD is your Short Currency) at a higher exchange rate of 0.7250.

The resulting gross profit on the Transaction would be US$500 being sale price (0.7250) less buy price (0.7200) x 100,000.

The net profit is determined after deducting commission (where applicable), Rollover charges, transaction costs and any other charges and is converted back to your Trading Account Currency


Profits and losses are realised if both the buy and the sell side of the Transaction have been completed and have been matched against each other or Closed Out. Profits and losses are unrealised if only one side of the Transaction has been completed (i.e. it remains an open position) and will only be realised when the other side of the Transaction has reached completion.


The Value Date for a FX Transaction is the date on which the parties (i.e. you and your broker) agree to settle their respective obligations. The Value Date can affect the Exchange Rate at which a FX Transaction is entered into. When you enter into a Margin FX Transaction with your broker, by default the Transaction will be a Spot Contract.


The Value Date for Spot Contracts is standardised and non-negotiable. For most spot foreign exchange contracts, the Value Date will be two business days from the trade date (T+2).

5. Forex Trading Examples

We have described how Forex Transactions work and the basic points of Forex.

One of the key advantages Forex has over other financial instruments is that relatively small lot sizes can be traded – lot sizes can be as small as 1000 units (one micro lot). Forex is dynamic, global, and liquid, holding the crown of the world’s largest market, with a daily turnover predicted in excess of $5 trillion dollars. We have included additional examples of how a forex transaction plays out in the panel on the right (from your PC) or below (from your mobile). Simply click on each example to view more or download our Forex Trading Examples .pdf for even more examples.

6. Key Benefits of FX Products

Margin FX provides a number of benefits which must be weighed against the risks of using them. The benefits of Margin FX are as follows:


You can use Margin FX to hedge your exposure to the Underlying Instruments.


You may take a view on a particular Underlying Instrument and invest in Margin FX according to this belief.


OTC contracts (such as the FX Margin) are not standardised and can be personally tailored to suit your requirements. For example, our supported brokers allow you to enter into FX Margin Transactions in small amounts whereas exchange-traded products have a minimum transaction size based on a dollar value.


Since Exchange Rates are constantly moving, there are always trading opportunities, whether a particular currency or precious metal is increasing or decreasing relative to another currency. There is the potential for profit (and loss) in both rising and falling markets depending on the strategy you employ.


Margin FX Transactions involve a high degree of leverage. These products enable you to outlay a relatively small amount (in the form of the Initial Margin) to secure an exposure to the movements in the value of the Underlying Instrument without having to pay the full price of actually acquiring the Underlying Instrument.


Another big advantage of Forex Trading is that modern technology allows the automation of most tasks, from system development to copying other peoples trades, to order execution. With a little nouse, you can use powerful software programs to help you gain an edge in the market, and at the same time save huge amounts of time!


Literally, trade from anywhere! One of the greatest advantages of trading forex is the ability to trade from anywhere that has an internet connection. If you are one of the lucky few with the skills to make profitable trading decisions you can trade from home, work, a resort, the beach, a golf course, a resort, on the move… you get the idea.

7. Margin Obligations

Forex products are subject to margin obligations i.e. you must have sufficient Net Free Equity in your Trading Account for security and margining purposes. You are responsible for meeting all margin obligations with your broker.


There are two components of the Margin Requirements which you may be required to pay in connection with Margin FX Transactions; Initial Margin and the Variation Margin.


Depending on the particular Margin FX Transaction, the market volatility for the Underlying Instrument and the Trading Platform you use, the Initial Margin for a Margin FX Transaction (where applicable) will typically be between 0.2% and 1% of the Notional value of the Margin FX Transaction, However, it is not uncommon for Initial Margins to be above this range.

Margin Requirements differ depending on the Trading Platform you choose and the broker you choose. In choosing a Trading Platform and broker, you should carefully consider the Margin Requirements of each Trading Platform as Margin Calls could have an adverse impact on your investment.

Your broker may, in their sole discretion and without the need to notify you, change the percentage Margin Requirements for a Trading Platform from time to time.


As the value of your Margin FX position will constantly change due to changing levels of the Underlying Instrument, the Margin Requirement (being the minimum Net Free Equity you must maintain in order for your broker not to Close Out some or all of your Margin FX Transactions) required to keep your positions open will also constantly change. This is commonly referred to as Variation Margin. The amount of your Margin Requirements (being the Initial Margin and any adverse Variation Margin) at any one time will be displayed on the open positions report made available through your Trading Platform.

Any adverse price movements in the market must be covered by further payments from you (unless you already have sufficient “Net Free Equity” in your Trading Account). Your broker will also credit the Variation Margin to your Trading Account when a position moves in your favour.

Your broker will determine the Variation Margin for a Margin FX Transaction by reference to changes in the value of the Underlying Instrument. In other words, each contract is effectively “marked to market” on at least a daily basis. “Marked to market” means that an open position is revalued generally in real time or at least on a daily basis to the current market value. The difference between the real time/current day’s valuation compared to the previous real time/day’s valuation respectively is the amount which is debited (in the case of unrealised losses) or credited (in the case of unrealised profits) to your Trading Account. The valuations are calculated using the closing value (at the close of trading on each day) of the Underlying Instrument as determined by the relevant Pricing Source. Intraday “marked to market” revaluations will be based on the last available value of the Underlying Instrument as determined by your broker in their sole discretion.


Margin Calls are made on a net Trading Account basis i.e. should you have several open positions with respect to a particular Trading Platform, then Margin Calls are netted across the group of open positions. In other words, the realised and unrealised profits of one Transaction can be used or applied as Initial Margin or Variation Margin for another Transaction.

When trading with any broker, it is your responsibility to monitor your Variation Margin obligations. Any notification of a Margin Call could be via a ‘pop up’ screen or screen alert which you will only receive notice if you access your online Trading Account via your Trading Platform. There may be instances where your broker does not provide you with a Margin Call notifying you of an obligation to meet a Variation Margin. This does not waive your obligation to meet that Variation Margin. If you fail to meet a Variation Margin your broker may in their absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open Transactions.


If you do not meet Margin Calls immediately, some or all of your positions may be Closed Out by your Forex Broker without further reference to you.

Most Forex Brokers generally applies risk limits (referred to as Default Liquidation Thresholds) to ensure that the percentage of your Trading Account balance which you are using at any one time to satisfy Margin Requirements (Margin Utilisation) does not exceed certain pre-defined levels. If your Margin Utilisation exceeds the Default Liquidation Threshold for your Trading Platform, a Margin Call will generally be applied to your Trading Account. If you do not meet a Margin Call immediately, your FX Broker may Close Out some or all of your open Transactions without notice to you.

The Default Liquidation Threshold is determined by the Forex Broker for your Trading Platform. It is implemented for risk management purposes and may be varied by the Forex Broker at any time.

With Forex if you fail to meet a Margin Call, then your forex broker may in their absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open Margin FX Transactions and deduct the resulting realised loss from your Trading Account. You may be required to provide additional funds to your forex broker if the balance of your Trading Account is insufficient to cover those losses. If a Close-Out occurs you will not be able to enter into another Transaction until you transfer additional funds to your broker.

8. Risks of Trading in Forex



Trading in the Margin FX involves a high degree of risk.

If there is an adverse change in the value of the Underlying Instrument, you will be required to transfer additional funds immediately to your Forex Broker in order to maintain your position i.e. to ‘top up’ your Trading Account balance. Those additional funds may be substantial. If you fail to provide those additional funds immediately, the Forex Broker may Close Out some or all of your open positions. You will also be liable for any shortfall in your Trading Account balance following that closure. This shortfall may, in some instances, be substantial.

You should be aware that the risks you face differ depending on which Trading Platform you choose to trade through. In particular, you will take credit exposure on the Forex Broker and Liquidity Provider with which the forex broker enters into Hedge Transactions (if any) in respect of your Transaction. Therefore, you should make your own assessment of both the broker’s ability to perform their obligations under the Margin FX Transaction and the relevant liquidity providers ability to meet its obligations under the corresponding Hedge Transaction (if any).


The following is a description of some of the other significant risks associated with trading Margin FX offered by a Forex Broker.



If you incorrectly place your intended order you are responsible for the result of the incorrectly placed order, including all costs to close out the position and any resulting profit or loss on the outcome.



The Forex Broker will have absolute discretion to Close Out your open positions at values they determine. The effect of your Forex Broker exercising their discretion is that they may Close Out your open position and you may suffer loss as a result (including actual loss or opportunity loss if the value improves from the value the open position was Closed Out). Your chosen Forex Broker is not responsible for any such loss.



When you place an order (i.e. request to open or Close Out a position), your broker has the absolute discretion of whether or not to accept and execute such request. The effect of your Forex Brokers discretion is that an order you give may not be executed and you may suffer loss (whether it be actual loss or an opportunity loss) as a result. They are not responsible for such loss.



Stop loss orders are often used to attempt to limit or minimise the amount which can be lost on an open Transaction. Stop loss orders may not always be filled and, in any event, may not limit your losses to the amounts specified in the order.



Under certain market conditions it could become difficult or impossible to manage the risk of open positions by entering into opposite positions in another contract or to Close Out an existing position. Market conditions may also mean that the price of your Margin FX trade may not maintain its usual relationship with the value of the Underlying Instrument.



In instances where you trade based on an Underlying Instrument priced in a currency other than your Trading Account Currency, your profit or loss will be determined by movements in the value of the Underlying Instrument and also by the impact of movements in the Exchange Rate. Adverse Exchange Rate movements could cause you to incur significant losses.



Under certain conditions, it may become difficult or impossible for you to Close Out a position. This can, for example, happen when there is a significant change in the Underlying Instrument over an extremely short period of time.



You will take on credit exposure with your selected forex broker. If the Forex Broker fails to perform its obligations to you then your corresponding Margin FX Transaction will be reduced accordingly. If the Forex Broker becomes insolvent, you might lose some or all of the balance of your Trading Account. You also might face considerable delays before you are able to access the amount (if any) that is able to be recovered from the Forex Broker.


There are a number of risks that arise from the processes by which the derivatives are entered into or settled, including risks associated with using internet-based Trading Platforms. Such risks include, but are not limited to:


Risks related to the use of software and/or telecommunications systems such as software errors and bugs;


Delays in telecommunications systems;


Interrupted service;


Data supply errors; and


Faults or inaccuracies and security breaches.

A disruption to a Trading Platform could mean you are unable to trade in Margin FX Contracts and you may suffer a financial loss or an opportunity loss as a result.

9. Styles of Forex Trading

Today Forex Traders have the ability to create income from Forex Trading in a number of ways ranging from active to passive.


Discretionary Trading can be an active approach to trading Forex. It involves making your own decision about the direction a currency pair might take and placing orders via your online platform manually (in general) in an attempt to profit from short term price fluctuations. This is an active approach to trading that is very hands-on and involves monitoring the markets on an intraday, daily or weekly basis. The advantage of Discretionary Trading is that the human brain can assess the impact of variables outside the data made available to a computer program, such as qualitative analysis of fundamental data, external data sources like bank economic forecasts and last, but not least the superior capability of the human brain when it comes to pattern recognition. The disadvantage of discretionary trading is the impact of fear, greed and ego on the decision-making process, meaning even discretionary traders can benefit from a set of guidelines covering trade setups and risk management.


Hybrid approaches to trading can also be utilised, and possibly with more success than each style of trading on its own. This can include making an assessment on a currency pair’s underlying conditions based upon fundamental research, valuations and forecasts from economists, Commitment of Trader (COT) reports, sentiment or other external information and then utilising a suitable type of trading system to enter and exit the market automatically according to your view. For example say you expect the NZD to fall against the USD you might choose a trading system that only trades the short side of the market until your view is realised, then you’d switch it off. The other advantage is if your view does not materialise utilising a trading system might result is smaller losses than simply being married to a particular view and holding onto losses in that currency pair.


Also known as Algorithmic Trading, RoboTrading and Autotrading. Systems Trading involves the use of a computer program, which makes the buy and sell decisions based upon price action, technical indicators or quantitative analysis. The advantage, if you can find a reliable trading system is that you can automate the trading on your account and the computer will monitor the markets placing orders on your behalf, which means you can devote more time to research or other endeavours. The disadvantage of trading systems is that their success rate is not high, and they’re subject to technology risks so require oversight.


Perhaps the most passive form of Forex Trading is known as Copy Trading or Mirror Trading. Copy Trading is the process of finding other traders with a track record and following their trades automatically on your account. Essentially you become your own portfolio manager and select a variety of traders to copy on your account. Copy Trading services allow you to view the track record of other traders and if you’d like to follow a trader simply click Copy on the desired strategy, enter your account number and the trades will be automatically copied into your account. You can start and stop copy trading at any time.