Financial Trading - The Basics
What is Forex?
The foreign exchange (‘currencies, Forex or FX’) is a market where participants buy, sell, exchange and speculate on currencies. In particular, it consists of trading one currency for another, ex: EURUSD. This means trading the Euro against the US dollar.
Forex and related markets is the largest and most liquid financial market in the world, where the average trade consists of trillions per day.
Trading foreign exchange may have various advantages because of its transparency, direct dealing, significant trading volumes, extreme liquidity and the great number of participants in the market including governments, central banks, banks, financial institutions, corporations, private investors, etc.
In addition, due to the different time zones of the major financial centers, starting from New York to Australia, Tokyo, Hong Kong, and Europe, the Forex market is open 24 hours a day (except on weekends), usually from Sunday 00:00 until Friday 23:15 (GMT+2 Winter time, GMT+3 Summer time).
Currencies that are traded against the US dollar are called Majors and make up the greatest number of foreign currency trades.
USD (US Dollar)
GBP (British pound)
JPY (Japanese yen)
CHF (Swiss Franc)
AUD (Australian dollar)
CAD (Canadian dollar)
Ex: AUDUSD / EURUSD / GBPUSD, etc.
Currencies that are traded against each other excluding the US dollar are called Crosses:Ex: CADJPY / EURAUD / GBPCHF…
When trading Forex, whether majors or crosses, the first currency (called base currency) represents the direction and the second currency (called counter currency) indicates the profit or loss.
What are CFDs?
A CFD (Contract for Difference) traded with Windsor are equity derivatives allowing investors to take positions on any CFDs, offered by Windsor for trading, without the need to buy or sell the share itself, and speculate on share price movement.
It is therefore an agreement between two parties to exchange the difference between the price of the opening and the closing of the contract (hence the name – contract for difference).
Upon closing the contract, the profit or loss is calculated by multiplying the difference between the buying and selling price with the number of shares. The major benefit of trading a CFD is the fact that the client can trade on margin – meaning client can trade a full portfolio of CFDs without having to tie up large amounts of capital.
At Windsor, we offer the following CFD contracts for trading:
- CFD Indices
- CFD Commodities – Energies
- CFD Commodities – Metals
- CFD Commodities – Treasuries
- CFD Commodities – Soft
What are Futures?
A future contract is a contractual agreement to buy or sell a specified commodity or financial instrument at a predetermined price, on a set date in the future.
Futures can be traded both on the trading floor of a futures exchange or through an electronic platform (OTC). Trading futures is made by buying or selling futures contracts which are standardized according to the type of the financial instrument, quantity and expiry date of each instrument.
A future contract is specified with the month during which the delivery or settlement is to occur i.e. if the product is gold and delivery is in July then the price quoted/traded is for July Gold.
All futures traded include therefore, a specific termination date consisting of the contract name, expiry month and year. The standard symbols used for each traded month, by Windsor are:
[Jan:January] – [Feb:February] – [Mar:March] – [Apr:April] – [May:May] – [Jun:June] [Jul:July] – [Aug:August] – [Sep:September] – [Oct:October] – [Nov:November] – [Dec:December]
Future contracts traded with Windsor are OTC (Over-the-counter Market), which is a market where financial products such as foreign currencies, stocks and other instruments are bought and sold outside the actual exchange.
What is a Lot?
A lot is the standard unit size of a transaction. Depending on the financial instrument traded, the lot size is determined; i.e. a standard lot traded at Windsor for Forex trading usually consists of a contract size of 100,000 (units of the base currency). The contract size is then proportionate as per the lot indication – standard, mini or micro lot.
As a result, a standard contract size of the GBPUSD is 100,000 GBP then the mini lot consists of a contract size of 10,000 GBP and the micro lot consists of 1,000 GBP accordingly
What is Spread?
When trading any financial instrument, you are offered two prices; the Bid price and Ask price. The Bid price is the selling price and the Ask price refers to the price offered for buying. The difference between the Bid and Ask is called Spread and varies for each instrument traded. The measurement between the two prices is usually referred to as:
pips [for Forex Currency Pairs]
cents [for Spot Precious Metals]
ticks [for Future (OTC): Currencies, Precious Metals, Commodities and CFDs USA]
points [for Future (OTC): Indices, Energies, CFD Indices and CFD Energies]
What does a “Long” or “Short” position mean?
A ‘long’ position or ‘going long’ is a market position where the client buys a financial instrument with the intent to sell it at a later stage, at a higher price. A “short” position or ‘going short’ is a market position where the client sells a financial instrument with the intent to buy it at a later stage, at a lower price.
What is Margin?
Margin is a guarantee for holding an open position. The amount is blocked from the client’s account when opening a new position and returned (unblocked) to the client’s trading account once the position is closed or hedged.
What is Leverage?
Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.