Basic Characteristics of Forex Orders

Now that we know what a financial instrument is, how do we go about buying one? You can’t go outside and shout in the street “I want one euro-dollar lot” and return home with one! After we decide to purchase an instrument we have to place an order, request a bid, negotiate a contract, fulfill a transaction or complete the operation – whatever you call it, the meaning is the same – you have to place an order for the purchase.

• Order type. You can press a key on your keyboard and immediately open an order or you can set up some parameters by which the order will be opened automatically in the future. It is because of the development of information technology, or IT, that this opportunity exists.
• Volume of an instrument. Every order contains information about how many instrument units to buy. Besides the desired volume there are some factors that affect the possible volume of an instrument such as characteristics of an instrument described above, available capital on the account and the level of a credit provided by the broker. The bigger the order the more money can be earned, but the potential risks increase too.
• Additional settings. Due to modern technology nowadays traders are able to add some additional settings to their orders such as “stop loss” or “take profit”. By means of such settings a trader can set up his trading in accordance with tight risk parameters. An order can be closed automatically if exchange rate goes “in the wrong direction” and losses overcome the level allowed.

Now let us study these characteristics more thoroughly and give some more formal definitions.

Currency operations are operations connected with currency trading, use of a foreign currency for making payments, use of the national currency in foreign-economic activity and import or export of currencies.

Let us note that there are conversional and depositary (sometimes called “depositary-lending”) operations. Conversional operations occur very fast, they may last for some seconds and a maximum of two days, but depositary ones sometimes may last for a few months or even years. Depositary operations are usually singled out into independent “money market” operations and mostly concern bank activity, rather than Forex activity.

Volume or the size of an operation is the quantity of a base currency we buy. Mostly this quantity is expressed in lots, which is a unit of measurement in Forex. 1 lot is equal to one hundred thousand units of currency,. So if we say “the volume of an operation is 3.5 lots” it means that we are talking about the sum of 350000.

The price of a point can be calculated very easily. You just have to multiply the volume of the operation (the amount of a currency bought) by the minimal change of a price – by one point. Therefore, the price of a pip is always dependent on the volume of the deal and is always expressed by the quotation currency (by the second currency of a pair). For convenience in trading the price of a point is converted into US dollars. While trading with Forex4you this operation occurs automatically.

For example, to make a 200000 trade with the EUR/USD currency pair the price of a point would be 200000 x 0.0001 = 20 USD and for a trade of 150000 units of GBP/JPY the price of a pip would be 150000 x 0.01 = 1500 JPY.

There is one important rule in the Forex market and that is that a trader always buys at an offer price and sells for a demand price. What is the offer price and what is the demand price you may ask? The thing is that all brokers, including Forex4you, display two quotations for every currency pair: the offer price (Ask price) and the demand price (Bid price). The difference between these two volumes is called the Spread and varies from broker to broker. Many companies including Forex4you do not ask for fees or other additional payments to be paid by traders as they gain their profit from the spread. A company sells a currency to traders a bit cheaper or more expensive than it bought it at.

An Order is the request of a customer to open the contracted operation to purchase a given currency pair. Usually an order is automatically transferred to a dealer or broker. At present the automatic order placement system is prevalent. It is called No Dealing Desk (NDD) technology and implies that there is no dealer involved in the transaction.

As we have mentioned above, a trader (customer) always buys at the offer price (Ask) and sells at the demand price (Bid), but the banks and dealing companies on the contrary buy at the Bid price and sell at the Ask price. Bid price is always lower than Ask price. So, usually customers see two prices at once: Bid price is for selling and Ask price for buying. For example, the quotation EUR/USD is sometimes represented as 1.2252/1.2256 or 1.2252/56 or even 52/56. All these forms of exchange rate representation express one thing: you can sell for 1.2252 (Bid) and buy for 1.2256 (Ask).

The Spread is the difference between the Ask and the Bid price at any given moment and for any given currency pair. Spread size usually has a floating character and depends on certain factors:

• General situation of the market. If the market is unstable, if there are preconditions for sharp falls or rises in certain currencies or if there is low activity, the spread may grow bigger.
• Stable demand for some certain currency. The more stable and liquid the market is the narrower the spread. For example, most brokers offer their lowest spreads for the EUR/USD currency pair – the most popular pair in the market.
• Volume of a bargain contracted. If the volume of a transaction is very high or very low in the comparison with average level, the spread may also increase.

An Open position (sometimes pose or order) is a trade that is still pending and as yet has an unidentified profit or loss. Every second your program updates data about how much you would gain or lose, depending on the change of rates, if you were to close the position.

Example of a speculative operation

Let us imagine a situation – a typical day in the life of a trader. John has woken up, had his breakfast (a sandwich and a cup of tea, if you are interested), turned his computer on and opened the website of his favorite broker. Then he spends 10 minutes reading about some news events which happened the previous night. It turns out that there were some important events in Great Britain. So, he looks at his terminal monitor to see the quotation for GBP/JPY (British pound and Japanese yen). It is 151.51/56. “Very well,” he says to himself, “that looks like a nice price”, and he opens a GBP/JPY contract for 400000 GBP at the price of 151.56 (a simple sandwich for breakfast?). John is an experienced trader so he knows what is what in Forex and his prediction that the price would rise comes true, and the rate reaches the 152.16 level. He decides to close his position completely which means he sells his 400000 pounds back to yen.

So, what did he get? In order to understand how much John would make we need to subtract 151.56 (the order price) from the final price of 152.16. This then gives us 0.40, which means John has made 40 points. Now we have to multiply this figure by the volume of the order: 0.40 x 400000 = 160000. It means that John gained a profit of 160000 Japanese yen.

After that we have to convert the profit into USD. As we have mentioned above all transactions are speculative and the deposit account of a dealing company’s client is usually established in US dollars.

Let’s now imagine that at the moment of closing the position the dollar-yen exchange rate is 107.19/26. In order to change yens for dollars we have to buy the USD/JPY currency pair. As it was mentioned, a trader buys at the Ask price (107.24 in this case) thereby John’s profit in US dollars is 236000/107.24 = 2200.67.
Nice one – 2000 dollars over breakfast isn’t bad. He probably won’t be going to McDonald’s for lunch.