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Margin FX

What is FX?

FX Examples

Spot Gold & Silver

What is FX?

What is it?
The global foreign exchange market is the largest market in the world with more than $2 trillion daily turnover - dwarfing the combined turnover of the world's stock and bond markets. The liquidity and competitive pricing available in this market are unsurpassed, and today with the irregularity in performance in other markets, the growth of foreign exchange trading, investing and management is accelerating.

Who trades?
Online trading, web-based research and analysis combined with competitive pricing have made the market more accessible. Hundreds of thousands of informed individuals, businesses and investment funds actively trade FX.

Why trade?
More recently, private investors and individual traders have entered the market for global currency as they discover the advantages of:

Ų Trading leverage

Ų Market liquidity 24 hours a day

Ų Commission free, very low dealing costs

Ų Dynamic movement and opportunities for profit

Aggressive investors are attracted by the volatility of the foreign exchange market and the opportunity for substantial profits, particularly when using leverage.

Margin Trading
Foreign exchange trading is normally undertaken on the basis of margin trading. A relatively small collateral deposit is required in order to initiate much larger traded positions in the market. When trading the main currencies, GO Markets requires margins from 1% with 2% being the average.

For example, in order to trade $1 million, an investor is required to have $20,000 as collateral in his or her account. As a result of such a margin deposit, the investor may obtain gearing of 50 times and a change of 2% in the underlying value of a trade will result in a 100% profit or loss on one"s deposit. Margin trading clearly demands a disciplined approach.

Trade Currency and Price Currency
A trade requires two currencies (a cross) in which one will be a long (bought) and the other, a short (sold) side. This means one is speculating in the prospect of one of the currencies appreciating in value against a relative weakening of the other. The trade currency is often the one with the highest value. When closing the position, the opposite trade is performed. The profit or loss will be apparent in the difference of the amount of dollars credited and debited for the two transactions. Dollars, in this case, is the price currency.

GO Markets will automatically exchange your profits and losses into your base currency.

Stop-Loss Discipline
There are significant opportunities and risks involved for investors in the foreign exchange markets. Aggressive traders might experience daily profit/loss swings of 20 to 30%. This calls for strict stop-loss policies in positions that are moving against you.

Fortunately, there are no daily limits on foreign exchange trading and no restrictions on trading hours, other than the weekend. This means that there will nearly always be an opportunity to react to moves in the main currency markets. Equally, there is a lower risk of being caught without the possibility of closing out one's positions.

Protective Stop-Loss Controls
For speculative trading, we would always recommend the placement of protective stop-losses. Using the GO Trader platform, investors can easily place and change all orders, including up to three contingent trade orders for each trade while watching developments in the market in real time. These contingent orders comprise two slave orders placed on an If Done basis if a primary order is executed. The two slave orders are themselves related as OCO orders allowing you to define both a profit taking and a stop-loss order around the position if the primary order is executed. If one of the orders is executed, the opposite order will be cancelled automatically.

Dealing Spread, but No Commissions
When trading foreign exchange, investors are quoted a dealing spread which offers a buying and selling level for the trade. When the investor accepts the offered price and receives a confirmation, the trade is done. There is no need to call an exchange floor.

The dealing spread for major crosses is typically 2-3 points depending on market conditions, e.g. USD/JPY 119.40-43. This would mean selling US dollars against the Japanese yen at 119.40 and buying at 119.43. There is no minimum trade size and if a client wishes to start trading FX with very small trades, GO Markets will charge a nominal USD 10 fee.

Spot and Forward Trading
When trading foreign exchange, investors are quoted a spot price. This means that if no further steps are taken, the trade will mature and be settled after two business days. If required, however, the spot trade will be automatically swapped forward with the prevailing rate for maturity the next business day, every trading day, until the position is closed. This can be undertaken on a daily basis or for a longer period.

Investors may also swap their trades forward from a few days up to several months depending on the timeframe of their chosen investment strategy. Although a forward trade is for a future date, the position can be closed out at any time. The closing part of the position is then swapped forward to the same future value date.

FX Examples

Example 1
An investor has a margin deposit with GO Markets of USD 100,000.

The investor expects the US dollar to rise against the Japanese Yen and therefore decides to buy USD 3,000,000.

On GO Markets, he is quoted USD/JPY 119.40-44, and he buys UDS/JPY at 119.44. Buy USD 3,000,000 x JPY 119.44 = Sell JPY 358,320,000

Four days later, the dollar has risen to JPY 120.50 and the investor decides to take his profit. The spread on GO Markets is 120.50-54. He sells at 120.50. Sell USD 3,000,000 x JPY 120.50 = Buy JPY 361,500,000

Profit / Loss calculation

As the dollar side of the transaction involves a credit and a debit of USD 3,000,000 the investor's USD account will show no change.

The JPY account will show a debit of JPY 358,320,000 and a credit of JPY 361,500,000 for a profit of JPY 3,180,000, equal to approximately USD 26,390 for a 26.4% profit on the deposit of USD 100,000.

Example 2
An investor analyzing the cross rate between the Euro and Swiss Franc believes the market is headed for a fall.

As he is moderate in his risk taking, he does not fully utilise the leverage available on his deposit, seeking instead to sell EUR 1,000,000 x 2% = EUR 20,000 = approximately USD 22,627.00 at the prevailing spot rate, thereby using approximately 22% of his available margin.

On GO Markets, he is quoted 1.5426/31. He sells EUR 1,000,000 v. CHF 1.5426 = buy CHF 1,542,600.

He protects his position with a stop-loss order to buy back the Euro at 1.5460. Two days later, this stop is triggered as the Euro strengthens short term despite the investor's original expectations. Buy EUR 1,000,000 v CHF 1.5460 = Sell CHF 1,546,000.

Profit / Loss calculation

The EUR side involves a credit and debit of EUR 1,000,000 thus the EUR account shows no change.

The CHF account is credited CHF 1,542,600 and debited CHF 1,546,000 for a loss of CHF 3,400 = approximately USD 2,500, a 2.5% loss on the original deposit of USD 100,000.

Due to the simplicity of the example and the short time horizion of the trade, we have disregarded the interest rate swap that would marginally alter the loss calculation.

Example 3
The investor believes the Canadian dollar will strengthen against the US Dollar. It is a long-term view, so he takes a small position to allow for wider swings in the rate.

On GO Markets, he sees a quote in USD 1,000,000 against the Canadian dollar of 1.3840 / 45. The investor sells USD/CAD at 1.3840. Selling USD is the equivalent of buying Canadian dollars. He swaps the position out for two months and receives a forward rate of 1.3880 for day 61 due to the interest rate differential between the two currencies.

After one month, the desired move has occurred. The investor buys back US dollar at 1.3615. He has to swap the position forward for a month to match the original sale. The forward rate is agreed at 1.3635. Buy USD 1,000,000 v. CAD 1.3635 = sell CAD 1,363,500 for day 61.

The two trades are settled and the trades go off the books. Profit secured on Day 31 can be used for margin purposes before Day 61.

Profit / Loss calculation

The USD account receives a credit and debit of USD 1,000,000 and shows no change on the account.

The CAD account is credited CAD 1,388,000 and debited CAD 1,363,500 for a profit of CAD 24,500 (approximately USD 18,000) = profit of 18% on the original deposit of USD 100,000.