1. What is a pip?

In the FX market, currencies are always priced in pairs. The quoted price is the level where we, acting as the market maker, are willing to buy/sell the currency pair. In the wholesale market, currencies are quoted out to four decimal places, with the last placeholder called a point or a pip. A pip in most currencies is one /10,000th of an exchange rate (in USD/JPY, it is one /100th).

2. How do I know which currency I am buying and which I am selling?

In the FX market currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold.

Consider the following example.

The current bid/ask price for USD/JPY is 110.02/110.07, meaning you can SELL $1 US for 110.02 Yen or BUY$1 US for 110.07 yen.

Suppose you decide that the US Dollar (USD) is undervalued against the Japanese Yen (JPY). Since the US dollar is the base currency, to execute this strategy you would BUY the pair i.e. buy dollars (simultaneously selling yen), and then wait for the exchange rate to rise.

3. How can I enter a short (sell) order to sell a currency pair that I don’t own?

In every currency trade, you are borrowing one currency to buy another. For example, if you buy the USD/JPY, you are simply borrowing yen to buy US dollars; if the US dollar rises in value, you will be able to sell them for more yen than you borrowed, and thus profit accordingly. If on the other hand you enter a short, or sell, order on the USD/JPY, you are simply borrowing US dollars to buy Japanese yen. If the yen rises in value, then you will be able to sell them back for more dollars than you initially borrowed – and will reap a profit in doing so. In every trade, regardless of whether you are buying or selling the currency pair, you are buying and borrowing a currency.

Please remember that trading currencies is very risky and you may lose all or some of your investment.

4. What is the difference between a market maker and a broker?

In the equities, futures, and currency markets, the vast majority of orders are executed by what is known as a market maker – a central party whose primary role is to buy from sellers and sell to buyers, thus ensuring that the market can operate smoothly. Market makers operate by charging a spread – a small difference between the price they buy at and sell at. For example, the market maker will buy from a seller at a price of 45, and sell to a buyer at a price of 50 – thus reaping a profit of 5. All market makers charge a spread, as it is their primary source of compensation for the service they provide.

Brokers, on the other hand, charge a commission – a per trade transaction cost they apply for their services. Trading directly with a market maker – and thus bypassing the commission costs imposed by brokers – is fairly difficult in the equities and futures market, and is generally associated with expensive software fees or clearing fees. In the currency market, though, no such hindrances exist: clients can bypass brokers altogether, and can trade directly with the market maker while incurring the spread as their only transaction cost.

5. How do you make money if you do not charge a commission?

In the equities, futures, and currency markets, the vast majority of orders are executed by what is known as a market maker – a central party whose primary role is to buy from sellers and sell to buyers, thus ensuring that the market can operate smoothly. Market makers operate by charging a spread – a small difference between the price they buy at and sell at. For example, the market maker will buy from a seller at a price of 45, and sell to a buyer at a price of 50 – thus reaping a profit of 5. All market makers charge a spread, as it is their primary source of compensation for the service they provide.

6. What is leverage?

Leverage is a means of enhancing returns or value without increasing the investment size. Leverage allows you to magnify your potential returns by trading more than you actually deposit. For instance, with FXTSP, traders can utilize up to 200:1 leverage* -- meaning they can trade 200 times the amount they deposit -- without being liable for more then their deposit. This means with a $100 margin deposit you can place a 20,000 base currency position in the market. In the event the total value of the account falls below margin requirements, the system automatically closes all open positions. This prevents clients' accounts from falling below the actual available equity particularly in a highly volatile, fast moving market. Bear in mind, though, that leverage is a double-edged sword.

* Without proper risk management, this high degree of leverage can lead to large losses as well as gains.

7. What is margin?

While clients trade in increments of 100,000 units of currency, they do not need to have such a large amount in their account. Instead, they can trade using the margin, which allows them to essentially borrow the rest.

For each lot (term used for increment of 100,000 units of currency), clients must maintain $1000 in the account for each lot of currency being traded (approximately 100:1 leverage). Once the account value falls below $1000 per lot, a margin call is triggered.

This ensures that traders can use margin without being liable for more than they deposit. Without proper risk management, this high degree of leverage can lead to large losses as well as gains

8. What is a margin call?

Accounts are set-up on a default margin on 1% (approximately 100:1 leverage). Meaning, clients must maintain in excess of $1000 in the account for every lot (100,000 position) that is open on the trading account. ($1000 is 1% of 100,000).

The following is an example of a margin call situation:

Assuming account balance is $8000:

If the client buys 6 lots of EUR/USD ($600,000) at a rate of .8960, which uses up $6000 ($1000 x 6) of the account’s usable margin, leaving an available margin of $2000. If the position were to go against the client by 34 pips to .8926, the floating trading loss would be $2040 and open positions will be closed on a margin call. Without proper risk management, this high degree of leverage can lead to large losses as well as gains

10. What is a stop loss order?

Stop/Loss orders allow traders to set an exit point for a losing trade. If you are short a currency pair the stop loss order should be placed above the current market price. If you are long the currency pair the stop loss order should be placed below the current market price. Stop/Loss orders help traders control risk by capping losses. Stop/Loss orders are counter-intuitive because you do not want them to be hit, however, you will be happy that you placed them! When logic dictates you can control greed.

10. What is a limit order?

Limit Orders allow traders to exit the market at profit targets. If you are short (sold) a currency pair the system will only allow you to place a Limit Order below the current market price because this is the profit zone. Similarly if you are long (bought) the currency pair the system will only allow you to place a limit order above the current market price. Limit orders help create a disciplined trading methodology and enable traders to walk away from the computer without constantly monitoring the market.

11. Where is the Central Location of the FX Market?

Currency trading is not centralized or an exchange, as with the stock and futures markets. The FX market is considered an Over the Counter (OTC) or ' Interbank ' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network.