The purpose of this ebook is to introduce newcomers to the forex

marketplace and CMTRADING. Remember that trading in forex is

inherently risky, and you can lose money as well as make money.

Manage your risk carefully and understand that although education

can help you earn profits, there are never any guarantees.

For more information read the risk warning on our web site:

https://www.cmtrading.com/en-US/risk-disclaimer/

Contents 1. Intro to the Forex Markets

2. Market Mechanics

i. Currency Pairs

ii. Quotes and Prices

iii. Calculating pips

a. Majors against the USD

b. USD as base currency

3. Leverage & Margin

4. Margin Call

5. Rollovers

6. Conclusion

The word FOREX is derived from Foreign Exchange; the forex market is the largest financial market in the world. The market is open 24 hours per day, five days per week, and has an estimated $3 trillion daily turnover. This tremendous turnover is more than the combined trading activity of the world's main stock markets on any given day. This makes foreign exchange a very liquid market and a very desirable focus for financial trading.

Intro to the Forex Market

Unlike many other securities markets—securities are tradable financial instruments—the forex marketplace does not have a fixed exchange. It is primarily traded through banks, brokers, dealers, financial institutions, and private individuals. It is known as an Over the Counter (OTC) market. For the retail client, trades are generally executed over the Internet. The market has generally required large deposits and high account margins that have precluded smaller investors, but in the last few years, such investors have been able to access the forex marketplace. With the advent of the Internet, and with growing competition, it is now easily within the reach of most investors.

Intro to the Forex Market

Currencies are traded in pairs and exchanged one for the other when traded. The rates at which they are exchanged are called the exchange rate. Around 70% of all trades involve the US Dollar. The four next most traded currencies are the Euro (EUR), Japanese yen (JPY), British pound sterling (GBP), and Swiss franc (CHF). These four currencies traded against the US Dollar make up the majority of the market and are called major currencies or the majors. Prices for forex currency pairs are known as “quotes”. The bid (buy) and ask (sell) are always from reliable sources. These quotes are normally made up of the top 300 or so large institutions, ensuring that CMTRADING can always place your order with an institution capable of fulfilling it.

Affordable Forex Trading—Where CMTRADING Excels!

Market Mechanics

How are forex currency quotes developed? Currencies are traded in pairs, and each member of the pair is assigned a symbol. For example, the Japanese yen is JPY, the British pound sterling is GBP, the Euro is EUR, and the US dollar is USD. Expressed as pairs, EUR/USD is the Euro-Dollar pair, GBP/USD is the pound-dollar pair, and so on. You will frequently see the USD quoted first, with a some notable exceptions. The first currency quoted is called the base currency. Have a look at this chart for some examples.

i. Currency Pairs

Currency Symbol Currency Pair EUR/USD GBP/USD USD/JPY USD/CHF USD/ZAR AUD/USD NZD/USD

Euro / US Dollar Pound Sterling/ US Dollar US Dollar / Japanese Yen US Dollar / Swiss Franc US Dollar / South African Rand Australian Dollar / US Dollar New Zealand Dollar / US Dollar

When you see forex quotes you will actually see two numbers. The first number is called the BID (sell price) and the second number is called the ASK (buy price). If we use the EUR/USD as an example you might see 1.29253/1.29279 the first number 1.29253 is the bid price and is the price traders would pay to sell Euros against the US Dollar. The second number 1.29279 is the ask price and is the price traders would pay to buy the Euro against the US Dollar.

ii. Quotes and Prices

You will also notice that there is a difference between the bid and the ask prices. That difference is called the spread. For the major currencies the spread is normally between 2.5-4 pips The PIP is the most common fractional increment in currency trading. A pip is the fourth decimal place of a quotation. If the EUR/USD moves from 1.29253 to 1.29263 that is one pip. The pip (or POINT, as it is sometimes referred to) is how we will measure profit or loss in forex trading. Spot Forex is traditionally traded in lots, referred to as contracts. The standard size for a lot is 100,000. In the last few years a mini lot size of 10,000 has been introduced. In fact, there are now micro lots available, with a position size of only 1000.

ii. Quotes and Prices

iii. Calculating pips a. Majors against the US Dollar

Let's take a look at some examples, using the standard lot of 100,000. Due to the small size of pips, it is desirable to trade large amounts of a particular currency in order to see any significant profit or loss. Each currency has its own value, so it is necessary to calculate the value of a pip for each particular currency pair. We also want a constant so we will assume that we want to convert everything to US Dollars. 1. The majors – EUR/USD, GBP/USD, AUD/USD AND NZD/USD On all the majors, for a position of 1 lot (100,000 of the base currency), each pip is worth $10.

iii. Calculating pips a. Majors against the US Dollar

a. EUR/USD Open position: Buy 1 lot (100,000) EUR/USD at 1.29530 Close position: Sell 1 lot (100,000) EUR/USD at 1.29930 1.29930 – 1.29530 = 40 pips 40 pips * $10 = $400 profit b. GBP/USD Open position: Buy 5 lots (500,000) GBP/USD at 1.52270 Close position: Sell 5 lots (500,000) GBP/USD at 1.52990 1.52990 – 1.52270 = 72 pips 72 pips * $50 = $3600 profit (Remember: for 1 lot each pip is worth $10, for 5 lots each pip is worth 5 *$10 = $50)

b. US Dollar as the base currency Let’s now calculate the value of a pip where USD is the base currency (the first quoted currency). Here we take the last 1 pip and multiply it by the value of the trade. USD/JPY at an exchange rate of 97.503 (.01/97.503) X $100,000 = $10.26 per pip Let’s say you buy 1 lot of $100,000 at 97.503. A few hours later the price moves to 99.424 and you decide to close your trade. You ask for a new quote and are quoted 99.424 /99.450. As you are now closing your trade and you initially bought to enter the trade you must sell in order to close the trade. So the price to close the trade is 99.424 The difference between 97.503 and 99.424 is 1.921 or 192.1 pips. Using our formula from before, we now have (.01/99.424) X $100,000 = $10.06 per pip X 192.1 pips =$1932.53

Leverage and Margin Leverage allows you to use your money to make larger trades and hopefully realize greater profits. It increases both your risk and your potential profits. Leverage actually means the percentage of a trade that your broker will lend you when you open a trading position. However, unlike regular loans, there is no interest to be paid on leverage loans. Your leverage depends on the size of the trades you make relative to the amount of money in your trading account.

Leverage and Margin CMTRADING allows you to increase your trade size through leverage by using your deposits as margin. Margin is your protection against trades going against you. Your margin is the minimum amount of money required in your account. At CMTRADING, the margin requirement is 0.5%; this means we require 0.5% of your trade size in order to lend you the amount you need for the trade. For example, if you are trading with a $100,000 position size, then you will need $500 (0.5%) in your account in order to make the trade.

The table below shows the minimum amount of money you need to trade a position of $100,000 using various common leverages (remember, the margin is the amount of money you must maintain in your account). Leverage does come with greater risk. If you use leverage to make a trade and it moves against you, your loss is much greater than it would have been if the position had not been leveraged. Leverage magnifies both profits and losses.

Leverage and Margin

Margin Call A margin call is made when a trading account no longer has enough money to support the open trades. This happens when there are too many losing positions and occurs to protect you and the company from a negative balance—to stop you owing more money than you have in your account. With CM Trading you will receive a margin call when your account reaches 0.5% of the total of your open positions Here is a typical example: You have an account balance of $5,000, and open a position to buy $500,000 USD/JPY. The minimum amount you need in your account for such a position is: $500,000 * 0.5% = $2,500 If the USD/JPY goes down, you will lose money on the trade, reducing the equity in your account. If your account equity goes down from $5,000 to $2,500 you will receive a margin call. The margin call appears on your trading platform. At this time you have 3 choices:

Margin Call 1. Do nothing—if USD/JPY continues to go down you could lose all your money 2. Close the position—you may decide to exit the trade 3. Close part of the position—for example, sell $250,000 worth, leaving you with $250,000 open If you do nothing, at 20% of your margin requirement the platform will automatically close the position. In this case, your margin requirement was $2,500. If the position continues to go against you, the platform will close the trade automatically when you have $500 remaining in your account. The exact level is not guaranteed as the market can move quickly. If you close part of the position, your margin requirement will only be on the remaining open position. In our example, if you close $250,000 and are left with $250,000: $250,000 * 0.5% = $1,250 This option gives you more opportunity to either continue trading or to cut your losses at an acceptable level.

Rollover Rollover (or Swap) is the interest paid or earned for holding a Forex position overnight. Each currency has an interest rate associated with it. As forex is traded in pairs, every trade involves not only two different currencies, but also their two different interest rates. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll). Rollover can add a significant extra cost or profit to your trade. The CMTRADING platform automatically calculates and reports all rollover for you.

About CMTRADING Created by traders for traders, CMTRADING’s founders have combined years of experience to create a one-stop destination for online trading. As an online broker, CMTRADING specializes in Forex, Futures, and Commodity trading. The CMTRADING Advantages: Market execution with NO requotes FREE webinars and tutorials Positive slippage and tight spreads CopyKat social trading 5 simple platforms

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