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Unlike most other Financial Instruments, Forex Trading is not conducted via a single Exchange. Instead Trading is operated “over-the-counter” (OTC) via a global network of major Banks and Institutions across World financial centers. Each time zone generally trades within its own business hours, each day starting in Sydney then Tokyo, London then New York. Making FX a real 24-hour, global market.
Cross-rates are based on major currencies from the US Dollar to the Swiss Franc to the Euro. A list of cross-rates can be found in the ‘Symbol Tree’ of the SITM Software Packages or obtained from any Forex Broker.
There are many uses for the Foreign Exchange Market. Banks, companies and governments that make buy and sell transactions in different currencies created its initial existence and liquidity. Such dealings may be purely for conversion or to hedge against any shift in exchange rates.
To illustrate hedging, a company imports clothing from the US. A weakening of the Australian dollar against the US dollar would decrease profits or increase the cost to their consumers. The importer could exploit an understanding of economic data and/or trend analysis to take a position to profit from currency shift equal to their US interests and effectively cancel out any change in value between the currencies. Of course this works both ways and would also cancel out any potential profits from a strengthening of the Australian dollar against the US dollar in this case.
Having said that, over 90% of trading is purely speculative with the specific intention of making a profit. The liquidity and diverse range of players makes market tampering almost impossible - offering piece of mind to investors. Another exciting draw card is leverage. Traders can take positions leveraged up to 100:1. Of course the importance of a mechanical approach and well-defined trading plan is vital for survival (when is it not?) in taking such positions.
Now let’s look at a recent daily ABC Trade on the Australian Dollar vs. the Japanese Yen as an example of FX trading in action. It is worth noting however, that some cross-rates may best be traded on a point swing chart.
For this example we will take a position equivalent to AUD$100, 000. As with Futures, Forex is traded on margin. In this case we will require AUD$1000 in margin to take a position. Below are details of the trade:
Entry Stop - 7651
Entry limit - 7697
Stop Loss - 7601
To take the entry stop price as the first example, the exchange rate at 7651 would be 0.7651 Yen for every AUD$1. This means that by selling AUD$100,000 we would receive 76,510 Yen. Therefore our risk before entering the trade is calculated as:
76, 970 – 76, 010 = 960 Yen at risk.
To convert back to AUD we divide the risk in Yen by the conversion rate at the time of 0.7651.
Risk = 960/0.7601 = AUD$1262.99
We take safe exit at the 75% for simplicity of the example.
Exit at 75% - 7819
78, 190 – 76, 510 = 1680 Yen.
Profit = 1680/0.7819 = AUD $2148.61
Cross-rate Conversion Table
| |
Cross-rate |
Yen |
AUD |
| Entry |
7651 |
76,510 |
100,00.00 |
| Stop Loss |
7601 |
76,010 |
98,737.01 |
| Exit |
7819 |
78,190 |
102,148.61 |
| Risk |
7601 |
960 |
1,262.99 |
| Profit (Loss) |
7819 |
1,680 |
2,148.61 |
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