What is the type of your broker? STP or Market Maker?
It always needs two parties to make a market. This will include a buyer and a seller. There is no difference in the Forex Market.
In the Forex Market the buyers and sellers could be individuals, businesses, investment banks, hedge funds, multi-national corporations and government organizations such as Central Banks.
A normal Forex broker operates and offers their clients two distinct business models under one roof. This allows investors the freedom to choose a business model that is appropriate and most suitable to a client’s needs.
These well-known business models are the two of the followings:
Market Making Business Model
In the case of the Retail Forex Market one side of the trade is the investor and the other is your broker being broker of choice.
This type of Forex broker provides the pricing required to allow the investor to participate in Forex Market activity.
Additionally, the broker operates as a market maker by providing bid and ask pricing to the investors to trade from.
A Forex broker being a “Market Maker” is often hated by many investors, because of its execution model.
- If a Forex broker is a Market Maker, the broker counter-orders all trades of its traders
- Then there will be complete conflict of interest between traders and the broker
- If a trader makes profits, then the broker makes losses
- So this type of Forex broker often cheat on its traders to earn more profits for themselves
There are also some Forex brokers with Market Maker model, but do not cheat on its investors.
Straight through Processing Model
In this case a Forex broker provides pricing direct through a well-respected selection of global liquidity providers.
The STP model is also known as the Agency model.
In the STP model, the investor acts as the client through their trading terminal, and is able to transact on prices quoted directly from our liquidity providers.
In return for acting as the link to the liquidity providers, the broker charges a brokerage fee that is calculated on the volume transacted.
STP Forex Brokers are often preferred by many investors.
Forex Brokers offer the “Tighter Pricing” possible as they can
Forex brokers are the intermediaries, as in a Forex broker works as a middleman between “liquidity providers” and “investors”.
Normally a Forex broker has contracts with several “liquidity providers” and receives price quotes from each of them.
Then the Forex broker will combine all of these “pricing” and offer them to its clients.
Although there will be necessarily trading costs charged by the Forex broker though, they can also offer even tighter spread than the “liquidity providers”, because there is only one Forex broker but there are many liquidity providers connected.
Some Forex brokers are able to offer trading costs from 0 on their trading platforms.
5 Decimal Points
It is generally accepted that the standard Forex Pip value is set at four decimal places. However some pairs such as USDJPY are limited to two places.
Standard Forex brokers give tighter pricing and therefore their trading platforms quote all prices in terms of five and three decimal places.
FOR EXAMPLE the current EURUSD rate is 1.06105 and the USDJPY is quoted at 121.117.
In this case, the smallest number displayed is the “point” and the second one from the right is the “pip”.
How to Make Profits and Calculate in Forex trading
How can a trader profit from trading in the Forex market?
A currency pair is split into two different components. These are simply called the Base Currency and the Counter Currency.
The Base Currency always relates to the first currency and the counter currency to the second in a pairing.
A little confused?
If investor chooses to trade GBPUSD the Base Currency is GBP (Pound Sterling) and the Counter Currency is USD (United States Dollar).
If for example, after analyzing charts an investor comes to the decision that the British Pound looks cheap where as the US Dollar is rather expensive; and to take advantage of the potential benefit of an appreciation in the Pound, the investor would buy the GBPUSD currency instrument.
Profits from Difference of Prices
While trading Forex, the amounts of your profits and losses will be depending on the difference of the opening and price and closing price.
If you expect the price of a currency goes up in the future, you may buy that currency with another currency.
Then you may want to sell that currency later on.
In this way, you can make a profit of the differences of opening price and the closing price.
Of course, if the price goes otherwise of your expectation, then you will lose that amount of money.
Example of Profit/Loss Calculation
To take this scenario a little further, an investor has £1000 of equity in his/her bank account.
Assuming that, other than the spread there are no other transaction costs at that very moment, the investor decides to pull the trigger and buy £1000 of the GBPUSD at 1.4700 at leverage of 1 to 1.
A few hours later and with much happiness the investor exits the trade at 1.4950.
In terms of profit and loss position let’s do.
The investor buys GBPUSD @ 1.4700.
The investor purchases £1000 @ 1.4700 and agrees to transfer USD 1,470.00.
The investor sells GBPUSD @ 1.4950.
The investor sells £1000 @ 1.4950 and agrees to receive USD 1,495.00.
The investor can see the net movement in the Base Currency and in this case the British Pound equates to zero.
However the net movement in US Dollar terms is:
USD 1,495.00 – 1,470.00 = USD 25.00
The net US Dollar difference USD 25.00 will be credited to investors trading account.
Demo Trading Account to see the Profit and Loss
If you have no idea how to calculate profits and losses, or not sure how much profits you can make with your funds by trading Forex, then you are recommended to open a Demo trading account to practice trading Forex.
Demo trading account is funded with virtual money, and you can demonstrate your Forex trading as you wish.
It is just a virtual money in the virtual market, so you will not lose or earn any by trading in the account.
But please remember, the result in your Demo account can not be compared to the one in a real/live account.
Know the 5 Basic Order Types in Forex Market
For any types of trading platforms, there are always following 5 order types available for traders.
By getting to know the advantages of each order types, you can plan for more complicated strategies.
1. Market Order
A market order or instant execution, allows the investor to open a Forex Market position at the next best available price.
This order type is used if the investor wants to gain immediate access to the Forex Market.
2. Limit Order
A limit order is an order to buy or sell at a specific price or better.
A buy limit order can be only executed at the limit price or lower, and a sell limit order can be only executed at the limit price or higher.
This means that if the investor is of the opinion that the current buy level maybe higher than where they wish to enter then they can use a limit order to open the position at a level that offers better value for the investor.
3. Stop Order
A stop loss order is not just used as a means to limit ones downside risk. A buy stop can be placed above the current price and a sell stop beneath the current price.
The question most inexperienced traders will ask is:
Why would a trader want to buy something at a higher price and sell it at a lower price?
The answer is simple market dynamics.
Traders are always looking for clues on where the price action will head to. Sometimes these clues give a positive result and sometimes create a loss. In trading, the key to making money is being patient.
Therefore it is sometimes better for the price action to confirm trader’s hunch by the price action moving higher or lower before investor decides to enter a trade.
By adopting such a strategy, the investor is able to avoid some of the pitfalls of false breakouts and fake breakdowns.
4. Stop Loss
The majority of trading platforms allow market participants to decide, before entering the trade, where the exit level should be placed.
This is a key component it the management and mitigation of risk.
It consequently limits the potential for excessive losses being generated.
The stop loss order would automatically action a trading order that flattens a position and crystalizes the loss.
5. Take Profit
At times, markets can move in a slow pace. Other times, extreme market volatility could take an open position into the the price target area only for the move to fade eventually.
A take profit order can be placed at a certain price level, it will then be automatically trigerred by the MT4 platform.
This takes out the stress of trying to manually flatten a position in a fast moving market.
Knowing that a stop loss order protects the investor from exaggerated losses and a take profit has predetermined a level to crystalize profits, the investor can in theory walk away from their trading terminal.
Each Strategy has different Trading Time Frames
There is not one type of trader and not all traders have the same profit or time thresholds.
Some traders use advance algorithmic models that enter and exit the markets automatically at a fraction of a second as they attempt to take small bites out of the bid and offer spread.
Other traders are scalpers who look to trade off both momentum and key support and resistance areas to generate profits. These trades can last for the period of seconds to a couple of hours.
There are also Swing Traders who look to try to take chunks out of the prevailing trend or position traders who look to fade moves to key daily, weekly and monthly levels. These trades could last a few hours or could be rolled daily and last weeks.
Some investors are end day closing data such as hedge funds and the longer term money managers who look to take positions that could last from days to months.
The Forex Market has lots of different market participants who all have different trading styles and time horizons. However all these different traders interact with one another. The ultimate shared goal ofcourse is to effectively make profit.