Basic Knowledge

What is foreign exchange market

Global foreign exchange market is the world’s largest and most popular financial trading market with daily trading volume more than 5 trillion US dollars as conservative estimate and a large number of individuals and organizations a large number of individuals and organizations involved. The US dollar trading volume accounts for above 86% of total trading volume topping the list; Euro accounts for 37% ranking in the second place; Yen accounts for 16.5% ranking the third.

The maximum daily trading volume in A-share market is as much as 70 billion US dollars, but it appears insignificant when compared with the foreign exchange market.

What do you trade on the Forex market

What you trade on the Forex market is “money”.Foreign exchange trading refers to the transaction in which you buy one currency and sell another at the same time, and it is conducted in the form of “Currency pair”, such as the frequently seen EUR/USD, USD/JPY. It is usually accomplished through brokers or dealers.

You can understand Forex trading in this way that regarding the buying of certain currency as the buying of the shares of a particular company. When you buy US dollars, you are actually buying the shares of US economy, and the price of this share directly reflects the market expectations about the American economic development trend at present and in future period of time. So we can understand foreign exchange rate as the ratio between the two countries’ economic growth.

Different from other organized exchanges (Shanghai Stock Exchange, Futures Exchange), foreign exchange market has no central exchange. We can understand foreign exchange market as a virtual market, which is formed by several banks worldwide through electrical networks and working 24 hours uninterruptedly.

Before 1990, foreign exchange was just a large-capital financial game designated for bankers and large institutions with entrance threshold of 10 million US dollars, and small capital was not allowed to get involved in foreign exchange trading. With the rise of the Internet, online Forex brokerage firms have been able to bring this appealing investment means into the public eye, enabling numerous medium and small investors to get involved.

Common transaction currencies:
Identifier Country Currency Currency nickname
USD US Dollar Buck
EUR EU Euro Fiber
JPY Japan Yen Yen
GBP UK Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Canadian dollar Loonie
AUD Australia Australian dollar Aussie
NZD New Zealand New Zealand dollar Kiwi
Note:In the three letters of the English identifier, the first two indicate the country, and the last one indicates the currency of this country.

When do you trade Forex?

Forex market is a globalized 24-hour-service trading market. At any time, there is always an economic or financial center in the world is in service, so the banks and institutions can trade Forex day and night. Therefore, we can either trade in the daytime or at night.

Because different countries are in different time zones, relevant currency pairs have different levels of volatility in different time zones. As a trader, you have to know the active trading hour of major markets, and how to trade according to the corresponding time.

As a general principle, a particular currency usually appears active to the maximum extent when this particular market opens. Take pound and relevant currency pairs as examples, although they are 24-hour active every day and available for trading, they tend to be active to the maximum extent and have the lowest spread in the trading period of London market; while yen and other relevant currency pairs tend to be more active on Tokyo business days. Larger amount of liquidity often result in smaller bid-ask spread.

The trading time of the major foreign exchange market is as follows:
Sydney-New York Time 17:00-02:00 (~4% of total transaction volume)
Tokyo-New York Time 19:00-04:00 (~6% of total transaction volume)
London-New York Time 03:00-12:00 (~35% of total transaction volume)
New York-New York Time 08:00-17:00 (~20% of total transaction volume)


As indicated in the above chart, the overlapping of the trading time of two major markets (London and New York) includes 3 hours from 08:00 to 11:00 (it will be different every day) New York time, producing more trading opportunities, which makes it a key trading period for many traders. Although there is overlapping of the trading time of Sydney and Tokyo markets, due to that the overall trading volume in these two markets is sharply less than that in the first mentioned two markets, the overlapping seems less important than that in the New York and London markets.

Though technically speaking Forex market will never close, in fact all major banks and transaction entities are off at weekends. Therefore the liquidity on weekends is extremely sparse, the trading volume is extremely small, and thus the volatility of the currency pairs is insignificant, as a result of which it’s difficult to execute transactions and the bid-ask spread is really substantial, so there are hardly valuable opportunities. Therefore, BPG trading platform closes at 17:00 Friday New York time, and reopens at 17:00 Sunday New York time.

Why Trade Forex

Compared with other investment forms, Forex trading has too many advantages, and following are among the most common ones:

1.It’s a market you can’t truly manipulate. The Forex market has such a big size and large trading volume that any individual (including central banks of all countries) is not able to have a long-term control of the market price.
2.The Forex trading can exert leverage and raise capital. In the forex transactions, you only need little margin to trade big enough transaction contracts. For example, the brokers will provide the leverage of 100~200:1, which enables us to execute 10 thousand dollars’ contract with 50~100 dollars’ margin.
3.The minimum initial sum to get involved is as low as 100 US dollars. This owes to the development of Internet technology.
4.In this bi-directional trade, you are supposed to profit in both rising and falling markets. Bi-directional operation (long purchase and short selling) gives us an opportunity to make a fortune regardless of price change.
5.Global 24-hour market:Opens at 05:00 Monday and closes at 05:00 Saturday, Beijing time. Many trading opportunities are produced in the afternoon or at night, Beijing time, so it’s very suitable for part-time investors.
6.Liquid market。The large scale of the Forex market ensures its excellent liquidity. In other words, in a normal market and time, you can trade at will with mouse clicks, instead of being “stuck” in one transaction.
7.Free resources:Demo trading account, news, chart, analysis etc.
8.Low cost:No closing cost, no transaction fee, no stamp duty, profit tax, extremely low transaction cost.

Several commonly used concepts about forex trading

Currency Pair    According to the quote convention, the quotation of Forex market is usually in the form of currency pair list and the currency on the left of list is called “base currency”, while the one on the right is called “counter currency” or “quote currency”. Take EUR/USD as an example, EUR is the base currency, USD is the counter currency or quote currency, the quote value means the amount of counter currency needed to buy a single unit of the base currency, and if the quotation of EUR/USD is 1.1300, it means it takes 1.13 US dollars to buy one Euro.

Therefore, any position that you open is actually equivalent to two different positions. For example, buying EUR/USD means buying base currency-euro (EUR) and selling counter currency-US dollar (USD), i.e. exchanging dollars for euros; buying EUR/JPY means buying euros and selling yens, i.e. exchanging yens for euros; and the like.

Bid price and ask price   The bid price is the price at which you can buy the currency pair, while the ask price is the price at which you sell the currency pair. The difference between the two prices is called “bid-ask spread”. The bid-ask spread is determined by price providers and the market liquidity at that moment. BGP has got streaming quotes from up to 20 banks or institutions to the platform. All tradable tools such as stock, bond, futures, options etc. have bid-ask spread, but often, we may not definitely pay attention to it.

Base point and spread   Base point means one point according to percentage calculating, used to measure exchange rate changes, and calculate profits and losses. For all currency pairs involving yen (JPY), one point is equivalent to one percent, namely the second decimal place; for other currency pairs, one point is equivalent to one in a million, namely the fourth decimal place. At BPG platform, the quotation of each currency pair is accurate to 0.1 point, named as “step”. Therefore, the quotation of yen currency pair lists the Thousandth decimal place, while the quotations of other currency pairs list the hundred thousandth decimal place. The decimal-based spread quotation enables the price providers further narrow the bid-ask spread, because this kind of quotation is not limited by the progressive law of integer-based spread quotation.

Pip value   The pip value is related to the contract size (namely trading unit). For one lot of standard contract of standard account, one point is roughly equivalent to 10 units of account settlement currency. If your account is settled in absolute dollar terms, every point is roughly valued at (slightly different depending on different currency pairs) 10 US dollars. For 0.1 lot (10,000)of mini-type contract, every point is roughly valued at 1 US dollar.
The calculation formulas are:
Pip value=Contract unit*0.0001。(Non-yen currency pair)
Pip value=Contract*0.01。(Yen currency pair
Example one: 1 lot of EUR/USD,100,000*0.0001=10USD
Example two:0.1 lot of EUR/USD,10,000*0.0001=1USD
Example three: 1 lot of GBP/JPY,100,000*0.01 = 1000JPY=9.18USD
Example four:0.1 lot of GBP/JPY,10,000*0.01 = 100JPY=0.918USD
Because the settlement currency of our accounts is US dollar, the platform will translate the currency into US dollars at the real-time exchange rate.

Leverage and margin   ”Leverage” and “margin” refers to the same concept. When the traders set up positions, the platform will block part of the sum of position value, which is called “margin requirement”. Margin requirement is also known as “Credit margin”, because this part of sum gets unblocked after the traders close their positions. Margin deposit is the requirement of trading rather than the costs of the trading.

One of the advantages of Forex market is that it provides the lowest margin requirement for any tradable financial instrument. It makes your purchasing power of your account is far higher than that of the share trading account or bond trading account of the same size.

Example one:Let us suppose that you open an position of one lot (100,000)of USD/JPY currency pair. You only need to freeze 100,000/100=1000 US dollars rather than pay 100,000 US dollars. (The actual amount depends on the leverage level set for your account, and in this example it’s based on 100 times leverage at BPG).

Example two:Suppose that you open an position of 0.1 lot(10,000)of USD/JPY currency pair. You only need to freeze 10,000/100=100 US dollars rather than pay 10,000 US dollars. (The actual amount depends on the leverage level set for your account, and in this example it’s based on 100 times leverage at BPG).

Please note that, margin requirement is not the maximum limit of potential losses in your position. It’s just the amount frozen by brokers for opening positions. You need to always keep in mind the actual size of your positions, because the calculating of profits and losses will be based on the size of the position, rather than the amount of the needed margin.

Leverage is a double-edged sword, when the position moves in the direction which is favorable to you, the leverage will increase profits, while the position moves in the direction which is unfavorable to you, the leverage will expand losses. Short-term traders usually have the habit of using larger leverage, because they don’t hold the positions for long. Medium & long-term traders use lower leverage, so slight volatility will not lead to mandatory closing of their positions. We suggest you using different leverages through different trading strategies, thus to find out the most suitable transaction size for you. Please note, your availability to the maximum leverage doesn’t mean that you should use high leverage frequently.

Mandatory Clearing   The frozen margin due to your opening of one or several positions is called “used margin” or “prepayment”. This money is the amount currently set aside according to your current positions as credit margin. “Usable margin” or “usable prepayment” is the remaining amount used to maintain your current positions or open extra positions. “Usable margin percentage” is the percentage of the usable margin from the net value of the account. If the usable margin percentage falls to 0%, the account will request for additional margin, and all positions will be closed immediately at the current exchange rate, which is called “Margin Call”. We don’t hope to receive a margin call from the account, because it will seriously hurt your confidence in trading. Therefore, it’s important to keep an eye on the usable margin percentage and to prevent over-leverage of the account.

Overnight rate   Overnight rate is the interest paid for or earned from overnight positions, and is also called holding cost at some platforms. The relevant target interest rate of each currency is different, and is generally determined by the central bank of this currency. When you are opening Forex positions, you are actually buying one kind of currency and selling another. So, you will earn the interest rate of the currency you bought, and pay the interest rate of the currency you sold. The net balance will be deposited into your account or deducted from your account every day (at 05:00 p.m. EST) as overnight rate or holding cost. It’s important to note that, overnight rate only applies to the open positions held at 05:00 p.m. EST. If you close your positions before overnight rate time, or open positions after overnight rate time, you will not have to pay any interest or have any interest to be deducted.

Example:When you buy one lot of AUD/USD currency pair, you are buying Australia dollars and selling US dollars. 100,000 Australia dollars can earn 100,000*3%/365=8.2 Australia dollars=5.98 US dollars every day. On the right side of this transaction, we sell about 73,000 US dollars (at present the exchange rate of AUD/USD is 0.7300), so we need to pay the rate of 73000*0.25%/365=0.5 US dollar. The difference between our earning and paying is the net value 5.48 US dollars, which is called earned overnight rate.

But in fact you cannot get so much rate or you may pay more rate, because banks have introduced bid-ask spread regarding interest rate and it’s just like the price spread between interest on deposit and interest on loan. When we lend to banks, they just pay us the interest on current deposit, but when we borrow from banks, they will charge the interest on loan from us. Therefore, for overnight rate, the final result is that what the traders pay is often more than what they earn (that’s why sometimes we get a minus after selling overnight rate and buying overnight rate). But it doesn’t erase the powerful influence of overnight rate on trading strategies. Some traders only open positions which can earn overnight rate, namely carry trade. This is one of the widely applied strategies in the market.

Please note: The overnight rate on Wednesday is typically equivalent to 3 days’ interest. The reason is that, generally speaking, Forex is a two-day delivery market. It means positions will be settled two days after being opened. At 17:00 Wednesday New York time, the positions will switch to Thursday’s positions. Technically, those positions will be settled on Saturday. However, banks are closed on Saturdays, so the positions will switch to Monday’s positions after the weekends. Overnight rate does not apply to the open positions held on Saturday and Sunday. Holiday will also affect the overnight rate timetable.

Margin Call   Margin call refers to the minimum amount of money that needed for traders to enter and trade in the market and it is set by the brokers. When the account funds of the traders are below the margin call level, the traders need to make additional deposit to maintain their positions. And the traders can also close some of their positions, to reduce the needed margin. The margin call level at BPG platform is 120%.

Level of mandatory closing of positions    If the amount nearly reaches the margin call level, but it cannot maintain sufficient funds and the account balance is lower than the level of mandatory closing, the open positions of the traders will be automatically forced to close, to protect against further losses.The level of mandatory closing of positions at BPG platform is 80%.