The Foreign Exchange (FX) market is the global financial market in which currencies are traded.
 
FX trading involves currency pairs, e.g. USD/JPY. When a trader buys the base currency (first currency), in this case, US Dollar (USD), he is effectively selling the denominating currency (second currency), Japanese Yen (JPY).
 
Unlike share trading where buyers and sellers trade in centralised Exchanges, FX trading is not conducted in centralised Exchanges. All transactions are traded and settled Over-The-Counter (OTC).
 
According to the Bank for International Settlements, the FX market had an average daily turnover of US$4.0 trillion as of April 2010.  It is the largest and most liquid financial market in the world.  The global FX market is open for trading, 24-hours a day, with the exception of weekends, Christmas (shortened trading hours) and New Year’s Day (closed).

Leveraged FX trading starts from Monday, 5am to Saturday, 5am (Singapore time).
 
There is no trading from Saturday, 5am to the following Monday, 5am.

The huge daily trading volume gives FX traders high liquidity to move in and out of the market.

FX traders can capture opportunities under different market conditions, be it a bull or a bear market. It is a tool for hedging one’s FX exposure or physical positions.

The basic strategy of trading centers upon one of these simple decisions, either a “Buy”or a “Sell” or a combination of both.

In general currency exchange, this could be illustrated by the following example:

a) A buyer wants to buy USD 100,000 against JPY at the exchange rate of 95.07. The buyer receives US$ 100,000 and pays ¥9,507,000

 

b) In the opposite scenario, at the rate of 95.05, the Seller pays out US$100,000 and receives ¥9,505,000

Continuing from the above example, the buyer or seller needs to pay out in full and complete the settlement (i.e. pay out and receive the currencies) immediately.

FX Price Quotation: USD/JPY 95.05/07
From the trader’s perspective, the buy rate is 95.07 and the sell rate is 95.05

In Leveraged FX trading, the trader only needs to pay an initial good faith deposit (or Initial Margin), giving the trader leveraging power.
 
Using the above example to illustrate a buy trade in Leveraged FX trading :

An initial margin of 4.2% is required, which translates to a pay out of US$ 4,200 to buy the contract of 100,000 USD/JPY at a rate of 95.07. The trader has initiated a long position of 100,000 USD/JPY on 12 Mar 2010. 
 
For trading purposes, the currencies bought or sold will normally not be delivered to the trader. Generally, the settlement date (known as value date) is 2 business days later with the exception of USD/CAD which settles on the next business day. This mode of FX transaction is known as “Spot FX”.

Examples:

Traditionally, a pip is the last decimal quotation and the minimal movement of a currency pair.  For most currency pairs that have 4 decimal places, 1 pip is the 4th decimal place (0.0001) in the currency quotation.  For example, in EUR/USD, a movement from 1.5600 to 1.5601 represents an increase of 1 pip.  Yen-based currency pairs have 2 decimal places and 1 pip here is the 2nd decimal place (0.01) in the currency quotation.  For example, in USD/JPY, a movement from 95.60 to 95.61 represents an increase of 1 pip. iOCBCfx offers fractional pip pricing (an extra digit to the right of the decimal place).

Fractional pip pricing is an advantage to the individual trader as it reduces bid/offer spreads.  The pip is also a means to measure the profit or loss.  Pip value is usually based on the denominating currency (second currency).

For example,

Profit or loss is generated when a position is closed.
 
In the following example, the trader decides to initiate a long position as he expects the USD to rise in value and the JPY to fall.

Buy 100,000 USD/JPY @ 95.07

However, the USD declines in value to 94.87 and the trader decides to close the position:
Sell 100,000 USD/JPY @ 94.87

The trader suffers a loss of 20 pips as the USD/JPY has fallen to 94.87, which translates to ¥20,000. This can be calculated as Amount  X (Selling Price – Buying Price) = 100,000 X (94.87 – 95.07) = -¥20,000
 
In addition, the trader pays a commission, for example, 1 pip or ¥1,000 for each buy and sell transaction, resulting in a total of ¥2,000 for commissions. Effectively, the trader suffers a loss of ¥22,000 in total.
 
However, the trader will make a profit if the USD strengthens to 95.37 as he has expected:
Buy 100,000 USD/JPY @ 95.07
 
Sell 100,000 USD/JPY @ 95.37
The trader will make a profit of 30 pips as the USD/JPY has risen to 95.37, which translates to ¥30,000. The calculation is 100,000 X (95.37 – 95.07) = ¥30,000.
 
In addition, the trader pays a commission for example,  1 pip or ¥1,000 for each buy and sell transaction, resulting in a total of ¥2,000 for commission . Effectively, the trader makes a profit of ¥28,000 in total.

All overnight positions will be automatically rolled over.  The trader’s account will be credited or debited daily based on the prevailing interest rate difference between the two currencies of the currency pair. The interest difference between the two currencies involved is calculated as swap points.
 
The swap points vary daily according to prevailing  market conditions.  Generally, the buyer of a higher yielding currency will be credited interest and the seller of a higher yielding currency will be debited interest.  However, it is not a certainty that the buyer of a currency pair that yields a higher interest rate over the other will be credited interest from the rollover.
 
Note: There is no interest credited or debited if a position is closed within the same business day, before the New York FX market closes.

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