Spot Forex Trading
Forex trading is the buying and selling of one currency against another currency, based on a pre-agreed rate for settlement in 2 business days. However, most houses provide daily rollover service to allow traders to hold their position for an indefinite period.
Trading Hours
The forex market is open and active 24 hours a day from Monday morning in Asia-Pacific straight through to Friday market close in New York. At Phillip, our trading week begins on Monday 7am to Saturday 5am.
Order Types
Day
A Day order is only valid for the day. It will automatically expire if the price is not met by the end of the trading day*.
* At Phillip, our day end is 5am (SGT) the following day.
GTC
A Good Till Cancelled (GTC) order allows the order to be active until market reaches the stipulated price or until the trader decides to cancel it.
GTD
A Good Till Date (GTD) order enables traders to stipulate the expiry date of a working order. As the name suggest, the order will work in the system till a stipulated date.
Example:
You place a GTD order to buy 100,000 GBP/USD at 1.6000 with the expiry date set as 1 March 2010. If the price is not met by the stipulated date, this order will automatically expire.
Limit
A limit order is an order that triggers the trade at more favourable levels than the current market price. It allows traders to buy low or sell high.
Example:
USD/JPY is currently trading at 90.50/52. Use a limit order if you wish to buy lower than the market price (90.52) or sell higher than the prevailing price (90.50).
Stop
A stop order is the opposite of the limit order. It allows traders to buy high or sell low and is often used as a stop loss order to limit losses on an open position.
Example:
You are currently long 100,000 EUR/USD at 1.4550. Use a stop order if you wish to cut loss when market moves against your position and drops to 1.4500.
Stop on Bid/ Stop on Offer
There are 2 types of stop orders – Stop on Bid and Stop on Offer. Essentially this gives traders the flexibility to choose their stop trigger point either on bid or on offer. For Stop on Bid (Offer), this means the stop will be triggered based on the bid price/ selling price (offer price/ buying price).
Example:
You place an order to sell 100,000 EUR/USD stop on bid at 1.4550. When market reaches 1.4550/52, the order will be triggered at exactly 1.4550 (the bid price).
However, if you place the same order to sell 100,000 EUR/USD using stop on offer at 1.4550, when market reaches 1.4550/52 the order will not be triggered as the offer price is at 1.4552. The order will only be triggered when the offer reaches 1.4550 at which time market will probably be at 1.4548/50*, and the stop will be filled at 1.4548 (the selling price).
* Assuming spread is constant at 2 pips.
Stop Limit
In Forex, slippage occurs when a limit order or stop loss is executed at a worse rate than originally set in the order. Slippage often occurs when volatility, perhaps due to news events, make an order at a specific price impossible to execute. In this situation, dealers will execute the trade at the next best price.
To manage slippage, you can make use of the stop limit order which is a stop order that works just like a limit order and is useful when market gaps. This is available on our FX365 and FXTrader platforms by selecting the “Maximum Slippage” field.
With this feature, you can pre-determine the maximum slippage, where you indicate the worst executed price that you are willing to accept. Hence, should market gaps past your maximum slippage, the working order will then become a limit order (since market price is now lower than your stop limit price).
Example:
You place a stop order to sell EUR/USD at 1.4550 with a maximum slippage of 10pips. This means the worst executed price you are willing to accept is 1.4540 (1.4550 – 10pips).
During normal market condition, this order will be executed at 1.4550 *. However, when market is volatile and gapping occurs the order will be filled at the next best price if it is within your range of 1.4550 to 1.4540.
But if market gaps past 1.4540 to 1.4520/22, this order will not be triggered instead it will continue to work in the system like a limit order till market rebounds back above 1.4540.
*Assuming stop on bid is used.
OCO
A one-cancel-the-other order consists of both the limit and stop order. When either of the order is triggered, the other will be cancelled. It allows traders to both take profit and cut loss and offers protection for open positions.
Example:
You are currently long 100,000 USD/SGD at 1.4100. You wish to take profit at 1.4300 and to cut loss at 1.4000. Simply place an OCO limit order to sell at 1.4300 and an OCO stop order to sell at 1.4000.
Hence, should market reaches 1.43000 first, the limit order will be triggered to take profit at 1.4300 and the stop order will be cancelled.
IFD
An If Done (IFD) order is also known as a contingent order. This order comes in handy when you are unable to track market movements frequently. There are two parts to this order, usually the first part is used to initiate a position and the second part is an OCO order which will only become active if the first part of the order is done.
Example:
You place an If Done order to buy 100,000 USD/SGD limit at 1.4100, with an If Done OCO order to sell limit at 1.4300 and sell stop at 1.4000.
The order will initially work to buy 100,000 USD/SGD at 1.4100. Once the first part of the order to buy USD/SGD at 1.4100 is triggered, the second part of the order – OCO order becomes active and starts to work in the system to protect your position.
Trailing Stop
A trailing stop is a useful tool to have especially when you have a winning trade going. Essentially it allows you to cut losing positions quickly and to let winning positions run. The idea is that when you have a winning trade on, you wait for the market to stage a reversal and take you out, instead of trying to pick the right level to exit on your own.
A trailing stop-loss order is a stop-loss order set at a certain number of pips above (below) the market price for a buy stop (sell stop). The trailing stop is adjusted as the market price moves, but only in your favour.
Example:
You are long AUD/USD at 0.8700. The market is currently trading at 0.8750/54 and you set the trailing stop at 20pips, the sell stop will initially become active at 0.8730 (0.8750 - 20pips).
If the market never moves up and goes straight down, you will be stopped up at 0.8730.
But should AUD/USD move higher to 0.8760 (0.8760 – 0.8750 = 10pips), the stop will adjust higher, pip for pip to 0.8740 (0.8730 + 10pips). The trailing stop will continue to adjust higher as long as market continues to move in your favour. However, should market stage a reversal your stop will be triggered at the last adjusted price or 20 pips below market.
Forex Terminology
Base Currency
The first currency is the base currency that is quoted relative to the second currency. It is also typically considered the domestic currency.
Reference Currency
The reference currency is the second currency quoted in the pair. All profits and losses are usually stated in the reference currency.
Spread
Spread is the difference between the bid and the ask price of a currency pair.
Pip
Pip – percentage in point is the smallest measure of price movement in Forex.
Lakh
Lakh is a unit which is equal to 100,000 commonly used in Forex.
Going Long
Going long refers to the purchase of a currency with the expectation that it will appreciate in value.
Short Selling
Short selling refers to the sale of a currency that the seller does not own. Short sellers assume that they will be able to buy back the currency at a lower cost and thus profit when the currency depreciates.
Squaring Off
To close an open position is called squaring off.
Rollover
A rollover is a transaction where an open position from one value date (settlement date) is rolled over to the next value date. This is carried out to allow traders to hold their position for an indefinite period of time.
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