Financial market trading is the simultaneous exchange, buying and selling, of one currency for another primarily for speculation purposes. Financial market is the largest market in the world in terms of volume, trading over US$5.3 trillion per day.
The New York Stock Exchange has a daily turnover of around US$50 billion, instead the foreign exchange market trades over $5.3 trillion daily, thus it is one of the biggest financial markets in the world. The size of the market brings many benefits in terms of costs and liquidity.
Financial marke trading is essentially the act of buying one currency and selling another within the same transaction, with the main intent of speculation. Currencies fluctuate in value, they both rise (appreciate) and fall (depreciate) against each other because of economical and geopolitical factors that affect their country of origin. The main goal of financial market traders is to understand these changes and buy or sell the stronger currency pairs against the weaker currency pairs in order to profit from changes in their value. There are no limits in how many trades one can do, or how long a trader needs to keep the currency pair. As soon as the value has changed and the trader is happy to close the trade, he can do so at any time. In fact, unlike other markets the foreign exchange market trades 24 hours a day.
The financial marke has no physical location or central exchange, unlike other markets, and this is known as OTC (over-the-counter). It is traded worldwide on a network of businesses, banks and individuals. Brokers like Tickmill give access to this pool of currencies through a platform called MetaTrader 4 (MT4), allowing traders to take advantage of the constantly fluctuating prices changing in value against each other.
The foreign exchange market is unique because it is one of the largest markets in the world and it operates 24 hours a day five days a week. Trading starts on Monday morning in Wellington New Zealand which is Sunday evening in London (22:00 GMT), and trades 24 hours until the close of business at 5pm (Eastern Standard Time – EST) on Friday in New York, which is 22:00 GMT. This gives traders the opportunity to act quickly and take advantage of economic news around the world around the clock.
In the past, financial market trading was a market accessible only by large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. These markets were initially only accessible via phone, but with the widespread availability of the internet, financial marke trading became accessible to the average investor. Smaller broker firms and software companies created their own platforms, like MetaTrader, giving the average investor access to large interbank liquidity pools.
Most currencies move less than 1% a day, making it one of the least volatile markets. By offering leverage, brokers have made a 1% movement very attractive. We offer up to 500 times leverage for clients of Tickmill Ltd (FSA SC Regulated) and Professional Clients, and 30 times leverage for clients of Tickmill UK Ltd (FCA UK Regulated), which means that your initial deposit could allow you to trade 500 or 30 times (depending on the entity) the value of your deposit. Example: If you decide to buy 10,000 euro against the dollar you would only need a deposit of 333.33 euro in US dollar value (390 USD approximately) as you are trading the dollar against the euro (for clients of Tickmill UK Ltd). Higher leverage means higher risk, but not all traders use the leverage offered as trading financial market is also about managing one’s risk.
Financial market prices are influenced by a broad number of factors from international to national economic or geo-political situations. These can be monitored following the news or our financial market calendar. They create a lot of trading opportunities to the average investor.
Some of the key factors that influence financial market prices are:
As with most financial instruments, the difference between the buy (bid price or buy price) and sell price (offer price or ask price) is called the spread. An example of the spread: If we take EUR/USD from our previous example you will see on our platform the price is quoting at 1.06021/ 1.06025 (in this case the spread is 0.4 pips or 0.00004). The exception to the 4-decimal places is the Japanese yen that displays a 3-pip spread 122.814/122.816 (0.2 spread).
Financial market trading is the exchange of one currency for another. EUR/USD rate represents the amount of dollars you can buy using one euro. If you feel the euro will increase, you would buy the euro using dollars, and when it appreciates, you sell the euro making a profit.
There are many factors that affect currencies. When it comes to trading FX, most currencies come in pairs. Take for example GBP/USD (British pound vs. US dollar). The fluctuations in the exchange rate between these two currency pairs is where a trader looks to make their profit.
In our example, a trader believes that GBP will strengthen (or ‘appreciate’) against the USD and therefore buys GBP. By buying GBP, they’re also simultaneously selling USD on expectations that the exchange price will rise in value.
Should their expectation be proven right, the trader’s profits would rise in line with every increase in the exchange price. The trader then decides to close the position, selling GBP; in this case with the exchange price higher than when they first bought it, netting them a tidy profit.
Conversely, if the trader is proven wrong and GBP depreciates in relation to USD, the GBP/USD exchange price will fall. This leaves the trader sitting on a loss, as each fall in the exchange price below their open level will net them a loss.
We give you the option of buying or selling currency pairs, so you can make a profit no matter which way the exchange price between the two currencies is moving. Instead of buying GBP, as in the above example, traders can sell GBP should they think its value will fall or that the USD will strengthen, potentially making them a profit if the exchange price then falls.
Financial market quotes consist of the base currency (left-hand side of the backslash) and the quote currency (right-hand side). The base currency is the currency what you are willing to buy using the quote currency, and the rate you see is how much quote currency is needed to buy one unit of the base currency.
The price represents how much of the Quote (Counter) currency is required for you to get one unit of the Base currency.
BASE CURRENCY VS. QUOTE CURRENCY
The base currency is the currency on the left, and this is the currency that you are willing to buy or sell. The quote currency is the currency on the right of the slash and this is the currency from which you are quoting. The quote currency is the financial market pair you are willing to trade in exchange for the base currency.
When reading a foreign exchange quote you need to remember the value of the base currency is always 1. Therefore, if we take the example of the EUR/USD live quote trading at 1.2019/1.2021:
The base currency is 1, therefore:
You will need 1.2019 of the quote currency (US dollar) to buy 1 of the base currency (euro).
If the quote of the financial market pair goes up to 1.2098/1.2099, it means that the base currency (euro) has increased in value, and it will require more quote currency to buy the base currency.
For these major pairs where the base currency is not in US dollars, a rising price means the US dollar is weakening and you need more USD to buy the base currency. In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.
Instead of these major pairs where the base currency is in US dollars, a rising price means the US dollar is strengthening and you need more quote currency to buy the USD base currency. In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.
Cross currency pairs are currencies that don’t involve the USD, thus called cross currencies, but the premise is the same: if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.
Like in other markets, financial market quotes have also two sides, the bid and the ask:
Financial market margin is the initial amount of money needed to open a trade. The margin is determined by the amount of leverage you choose. You can choose Financial market leverage from 1:1 (i.e. putting a down payment of 100% of the full value of the trade) up until 1:30 (only 3.33% of the trade – $100,000 trade only requires $3,333.33), if you are a client of Tickmill UK Ltd (FCA UK Regulated), or up until 1:500 (only 0.2% of the trade – $100,000 trade only requires $200) if you are a client of Tickmill Ltd (FSA SC Regulated) or a Professional Client.
If we look at the financial market, often you will see a currency moves less than 2% a month. A professional trader finds this unattractive. What makes the Financial markett attractive is that brokers offer their clients means to leverage their money and trade more than what they have in their account.
The definition of leverage in financial market is the ability to trade a large amount of money using very little of your own money (as little as 3.33%).
It is thanks to leverage that a financial market can make a living without having substantial amounts of money to trade. To understand the concept fully let’s create a simple example of leverage in financial market.
Trader A decides to open a position of $100,000 to trade a movement in the British pound vs. the US dollar (GBPUSD) 1.4292/1.4294. Trader A’s broker allows him to trade 1:30 of his capital in his account. In this case, he wants to open a trade with leverage 1:10, therefore he needs $100,000 / 10 ratio = $10,000 in his account to open a trade with the value of $100,000. The deposit of $10,000 will become the deposit to open the trade or better known as the initial margin requirement.
The trade moves 1% in the chosen direction of Trader A. Therefore, the value of the trade now is $101,000.
Now to understand the power and risk of leverage, let’s calculate Trader A’s return on investment. He put a margin/deposit of $10,000 and the trade is in profit of $1,000. Trader A has made a 10% return on his investment:
ROI = (gain from investment – cost of investment) / cost of investment
10% = ($101,000 -$100,000) / $10,000
If the broker did not allow Trader A to leverage his money, he would have used $100,000 to trade $100,000, when his investment gained 1% he would have also gained only 1% return on his investment:
ROI = gain from investment – cost of investment / cost of investment
1% = ($101,000 -$100,000) / $100,000
ROI = Net profit / total investment *100/100
1% = 1000/100,000*100/100
Here are the various leverage ratios, margin requirements, trade value and ROI you receive with $1,000 initial margin. The ROI is calculated on a 1% gain of the trade.
Now let’s return to the above example and look at the dangers of leverage too.
The trade now goes in the opposite direction of what Trader A was expecting. The value of the trade has dropped to $99,000. He has lost $1,000 or 100% of the money he invested.
ROI = gain from investment – cost of investment / cost of investment -100% = $99,000 -$100,000 / $1,000
It is extremely important that when you place your trade you understand the risk involved, your risk tolerance (how much risk you can manage and are willing to take).
So as we learnt from the example.
The margin in financial market is the deposit needed with the broker to open a trade with a greater value. The percent margin depends on the leverage the trader uses. You can place a margin range from 0.2%–100% the value of the full trade.
Below is a table that shows the amount of margin required using different leverages with a financial market trade worth $100,000. You will note that as the leverage increases the margin needed decreases.
The pip is a numeric value and represents the smallest price change in a currency pair. The value of one pip is 0.0001, two pips – 0.0002, three pips – 0.0003, etc. In most currencies, the pip is the fourth decimal. The fifth decimal place represents one tenth of a pip. Only the Japanese yen has a pip value of two decimals.
A financial market pip is the smallest numeric value in a currency pair. If we take the price of the euro vs- US dollar 1.2019/20, the last numeric value of the price is the pip. Pips are priced in four decimal points in most currencies. For example, one pip is 0.0001, two pips – 0.0002, three pips – 0.0003. The pip is the smallest price change that an exchange rate can make.
The only currency amongst the major pairs that is priced in two decimal places is the Japanese yen 116.83/85 (one pip equals 0.01)
The financial market spread is the difference between the buy price (bid) and sell price (offer). For example, if you change money at the airport you may get a EUR/USD rate of 1.2020/1.2620. This is a spread of 600 pips. Instead, financial market investor would pay 1.2020/1.2022 – a spread of 2 pips.
The financial market spread is the difference between the buy price (also called the bid) and sell price (also called the offer). The buy (bid) price is where the market participants are willing to buy currencies from you; the sell (offer) price is where they are willing to sell you a currency. If we take the EUR/USD rate above 1.2020/1.2022, this has a spread of 2 pips. When you go to a bureau de change, you will notice the spread is very wide. Bureau de changes does not charge a commission but they build their costs into the financial market spread. For example, if you change money at the airport you may get a EUR/USD rate of 1.2020/1.2620. This is a spread of 600 pips.
How does a wide spread affect you
When you are trading, you want to keep your costs and commissions as low as possible. We will show you an example on what a wide spread could cost you. Let’s say you decide to change or trade 10,000 to euro and back again in one transaction. This will give us the idea of what a spread would cost.
Exchanging currencies at the bureau de change; exchange rate 1.2020/1.2620. Let’s calculate the cost of the spread by buying and selling euro at the same time.
You sell 10,000 EUR at the bid price of 1.2020.
10,000 EUR * 1.2020 = 12,020 USD
You sold 10,000 EUR and bought 12,020 USD.
You immediately decide buy back the 10,000 EUR at 1.2620
10,000 EUR * 1.2620 = 12,620 USD
You sold 10,000 EUR for 12,020 USD and bought 10,000 EUR back for 12,620 USD. The difference is the cost of the spread if the market does not move.
12,020 USD – 12,620 USD = $600
Trading currencies with your broker; exchange rate 1.2020/1.2022. Now let’s calculate the cost of the spread your broker offers you using the example above.
You sell 10,000 EUR at the bid price of 1.2020.
10,000 EUR * 1.2020= 12,020 USD
You sold 10,000 EUR and bought 12,020 USD.
You immediately decide buy back the 10,000 EUR at 1.2022
10,000 EUR * 1.2022 = 12,022 USD
You sold 10,000 EUR for 12,020 USD and bought 10,000 EUR back for 12,022 USD. The difference is the cost of the spread if the market does not move.
12,020 USD – 12,022 USD = $2
Considering the example above, you can see what the cost of trading is and be able to compare brokers.
Financial Market Trading hours: 24h a day / 5 days a week
The financial market is open 24 hours a day 5 days a week. Trading starts with the opening of the Asia trading session on Monday 9:00 a.m. in Sydney and Tokyo (Sunday 22:00 GMT), and financial market trading closes on Friday at the close of the New York trading at 5:00 p.m. EST (22:00 GMT).
The financial market is open 24 hours a day during the week, starting Monday morning in Sydney, Tokyo with the open of the Asian trading session, and closes on Friday afternoon in New York with the close of the New York trading session.
This gives traders a great advantage of being able to get in and out of trading opportunities at any time and to close a trade if there is news around the world and this affects the markets. Stock market traders need to wait for the markets to open the following day, if any news comes out during the evening or night.
Even though the financial market trading time is open 24 hours, traders tend to trade mainly when there is more trading activity. This happens during market hours of the stock market, with peaks at markets cross over and when there is economic data to be released.
Risk management in financial market trading is the ability to limit your losses and run your profits in order to make your winning trades larger than your loosing trades, by simply using position sizing, stop losses, take profits and a positive ration. This will ensure a trader’s survival in adverse markets.
Risk management is the heart to successful trading. Markets are unpredictable and uncontrollable, a trader can only control his entry and exit points and manage his risks, in order to be successful.
Risk management is the process of taking the maximum advantage of the trade when you are right and minimising the loss when you are wrong, risking the least possible capital. The goal is to live to trade another day.
The risk management mix is made up of three things:
A) PHYSICAL STOP-LOSS
Stop-losses are one of the most crucial aspects of risk management, they are designed to reduce losses, protect the trader’s account from being fully exposed to the markets, potentially losing the full balance.
The most common type of stop-loss is the physical stop-loss. This is an order placed on a trade in your Metatrader (MT4) account. The stop-loss, as the name suggests, closes the trade at a price you define, normally when the trade is in a losing situation. Using a physical stop-loss helps you clearly define the amount of risk or loss you are willing to tolerate.
Stop-losses should be placed according to the market conditions, and in line with the risk you are willing to take. This should be a balance between too close and too far from the market price.
Stop-losses can also be moved during the course of an open trade in order to lock-in profits. When the position is in profit, the trader can move the stop-loss closer to the market price, locking in profits. A good risk management strategy implies moving stop-losses closer to your position and not widening the risk or loss on your trade. Remember, good risk management minimizes your losses and results in winning trades.
B) MENTAL STOP-LOSS
Some more experienced traders use mental stop-losses. A ‘mental’ stop-loss is not really a stop-loss that is placed on your account, but it is a price level, at which the trader decides he would rather get out of an open position. At that point he will manually execute the trade. This type of stop-loss should be used by more experienced traders, as a lack of discipline could put the full account balance at risk.
Mental stop-losses only work if you have enough discipline to close your losing position at the decided price level, which is very hard for many traders.
Position sizing is a second aspect of risk management. The position size and the stop-loss price determine the amount of money at risk on each trade. Generally speaking, traders do not risk more than 5% – 10% of their total account equity on each trade. The whole concept of risk management is to stay in trading long enough to recover any losses.
Position sizing can also be leveraged when closing a profitable trade. Professional traders often close half of their trade, taking partial profit at certain price levels and letting the rest of the trade run.
The reward/risk ratio is a fundamental concept in risk management, it will determine success or failure in trading. Very often losing trades outnumber winning trades, depending on strategy and trader’s ability, thus to survive in financial market trading it is essential to maintaining a healthy reward/risk ratio.
If we place a trade and decide we are willing to risk $100 and take profits of $100, this is a reward/risk ratio of 1:1.
As we stated above, more often than not, there are more losing than winning trades, thus a reward/risk ratio of 1:1 will deplete your account very fast. If your strategy results in every second trade being successful, having a reward/risk ratio of 2:1 will keep your account balance growing. Therefore, it is essential that you let your winning trades run for as much as possible, a minimum of 2:1.
It is worth noting that a higher reward/risk ratio will bring less wins, as the financial market market is not always following a trend, but the amount of profit should compensate for that.
Five risk-management techniques that should be an integral part of your financial market trading strategy:
An Order is an action you perform to enter or exit a trade. A “Market order” is trading at the current market price. A “Limit Order” enters a trade at a future price, lower or higher than the current price in either direction, Long or Short. Take Profit, is closing a trade when in profit. Stop loss is closing a trade at certain loss level to limit it from going any further.
A Market order is an order to buy or sell an asset at the current market price.
You enter a trade immediately.
If the market is moving fast, you can suffer slippage. It is the difference between the expected price and actual price the trade is executed at, which may result in an immediate loss. This is an unrealized loss, as you have not closed your position yet. If you decide to close your position immediately after opening the trade it is a realized loss.
A Limit order allows you to enter the market only when the price reaches the level you have specified. With a limit order, you can trade in both directions when the price is met.
You trade only if certain conditions you have defined are met, example: The price reaches a certain level.
You do not need to monitor Your PC. You can leave the order in Your MetaTrader 4 platform.
If the price comes close but does not reach the price you have determined, the order will not execute. This is a missed opportunity.
You cannot specify a range, but only an exact price.
You can suffer slippage.
Examples of a Limit buy order above the current market price. Let’s say you feel EUR/USD will trade upwards, but you want to start your trade only when it breaks out. You can place your limit buy order above the market. Cons: If the price moves fast past your limit order, your trade can get executed at a less favourable price.
Examples of a Limit buy order below the current market price. Let’s say you feel EUR/USD will trade upwards, but you would like to get in at a cheaper price, thus you want EUR/USD to go lower, then trade back upwards, trading on a retracement. You can place your limit buy order below the market price. Cons: If the price moves down but turns around just before reaching your price, you have missed out on the trade.
A Take-Profit order closes your trade when it reaches the price you have defined, which is normally in profit.
It locks in profit at the price you have defined.
The trader does not need to monitor the market, once the price is reached the trade will close.
If the price is missed by one or two pips, and the trend reverses no profits will be locked in.
Example of a Take-Profit order: You have entered a EUR/USD trade at 1.1460, you feel the trend will continue in your favour, therefore you add a Take Profit at 1.1490. When the price reaches 1.1490 the Take Profit order will execute, closing your trade in profit.
Stop Loss order
A Stop-Loss order is similar to a take-profit order but it is used to limit your losses. A Stop-Loss order will close your trade when it reaches the price level where you would like to stop trading and take your losses, as per your risk management strategy.
A Stop-Loss order limits your losses to an amount you feel comfortable with. You don’t need to monitor the market; once the price is reached the trade will close.
If the price is reached and the trend changes back in your favour, your trade will be closed out.
Example of a Stop-Loss order. You have entered a EUR/USD trade at 1.1460, as you expect the price to continue rising, should the trend change, you would like to limit your losses, thus you place a stop loss below the price at 1.1430, 30 points below your entry, limiting your loss to 30 points.
A Rollover in financial market is the difference in the interest rates paid or received by the trader from the two currencies traded. Each currency has an interest rate, and when you trade a financial market pair, you are normally long with one currency and short with the other (i.e. borrowing one pair and lending the other). The difference between the interest rates is the rollover paid or received by the trader when holding the position over night.
A Rollover (or Swap) in financial market is the interest rate earned or paid for holding a currency pair overnight. Each financial market trade is an act of buying and selling of two currencies. Each currency has an interest rate associated with it. When holding the pair overnight, the difference between the two interest rates is paid or received by the trader. If the interest rate on the currency pair you bought is higher than the interest rate on the currency you sold, then you will receive the rollover fee, this is called a “positive roll”. If the interest rate of the currency you bought is lower than the interest rate of the currency you sold, you will pay the rollover fee, this is known as a “negative roll”.
LONG TRADE FORMULA: +(%) – (%)
SHORT TRADE FORMULA: -(%) + (%)
When you buy EUR/USD you are selling the US dollar and buying the Euro. If the Euro interest rate is 3% and the US dollar interest rate is 1.5%, the rollover fee would be +(+3%) – (+.1.5%). In this example you are earning 1.5% annually. You then divide this by 365 to get your daily fee.
If instead you sell EUR/USD, you would pay the 1.5% fee, calculated daily.
However, please be aware, the interest rate difference calculation is not based on the central bank rates, but is based on overnight interest rates, as the currencies are borrowed or lent unsecured between banks.
Many countries are currently adopting negative interest rates. Let’s take the example above and apply the current negative interest rates.
If you buy EUR/USD, the current overnight rates are: EUR = -0.5 and USD = +0.4. Now let’s apply the formula above:
+(-0.5) – (+0.4) = -0.9. In this scenario you pay the interest rates, as the Euro has a negative rate.
If you sell EUR/USD, the formula above would be – (-0.5) +(+0.4) = -0.1. In this scenario you still pay the interest rates.
The Rollover fee is debited or credited at the end of the financial market trading day. The financial market trading day ends at 5 pm in New York (9 pm GMT, 10 pm in London), therefore any trader holding a position at 5 pm will either pay or receive the rollover fee. The fee is applied directly to your account within 1 hour.
Liquidity providers, most global banks and financial institutions are closed on weekends and holidays, this does not allow you to close a trade over the weekend. The interests are still applied during these days, even if the banks are closed. The Rollover fee gets charged to your account on Wednesday, as the fee has a 2-day settlement period, therefore the weekend rollover is accounted 2 days later, on Tuesday night.
The same applies on important holidays, as the Rollover fee is aggregated to the following day’s fees. Example: During the US Independence Day, on July 4, all American liquidity providers are closed, therefore the extra day of rollover is added at 5 pm on July 1 for all US dollar pairs
There are multiple advantages to trading currencies. Financial market trading is a 24-hour market, allowing you to trade both long and short positions without any restrictions, there are no clearing fees, no exchange fees, no government fees and no brokerage fees. Currency trading have low transactional costs and there is no fixed trading size.
Currency trading, especially online financial market trading, has become extremely popular over the last 15 years as trading platforms have become available to more retail clients, not only institutions, giving everybody the opportunity to take advantage of the financial market trading benefits.
Currencies are traded worldwide during various business hours in all time zones, thus making the financial market a 24-hour 5-day-a-week market. There is something happening at any given time on the market, giving around-the-clock opportunity to trade.
Financial markethas no limitations on trading in both directions, unlike some markets where it can be difficult to sell short. There is, however, no bear market in financial market.
Financial market has no fees, unlike the other markets. No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers earn their share with “bid/ask spread“.
With the advent of electronic trading platforms, there is no middleman involved, allowing you to trade directly with the market.
Financial market allows you to size your trades as you wish, unlike the futures markets, where the sizes are standard contract sizes determined by the exchanges. On the futures market, the standard contract size for silver is 5,000 ounces. On the financial market market, you can set your own size, which is essential in managing your currency trading risk. Traders can risk as little as $25.
The cost of a financial market trading lies in the spread, but since financial marketis such a liquid markets with an unmatched liquidity, transactions costs, or the bid/ask spread, can be as low as 0.1%, or even 0.07% with the dealers.
Liquidity is fundamental in trading, it helps a trader get in and out of the markets with ease and with very low spreads. financial market is a $5.3 trillion-a-day market, with most of it concentrated on the major pairs, allowing traders to get in and out of their trades with great ease.
We allow clients of Tickmill Ltd (FSA SC Regulated) to trade with a leverage of up to 1:500 and clients of Tickmill UK Ltd (FCA UK Regulated) to trade with a leverage of up to 1:30, thanks to the deep liquidity available in the financial market. Even the smallest moves on the market can bring big gains or losses. Leverage can be both good and bad, as it can significantly increase your losses as well as your gains.
As the world becomes more and more globalized, investors hunt for opportunities anywhere they can. If you want to invest in another country (or sell it short!), financial market is an easy way to gain exposure, while avoiding such inconveniences as foreign securities laws and financial statements in other languages.
Financial market trading and brokers have become very competitive. Because of that, tools like technical analysis packages or real time news are offered for free in trading platforms like MetaTrader 4. Previously, such tools would have cost stock and futures traders hundreds of dollars a month.