What is FX?
FX is short for Foreign Exchange, which refers to the market where different currencies are bought and sold. Among the best-known currencies are the US Dollar (USD), the British pound (GBP) and the Euro (EUR).
FX involves trading one currency for another at an agreed-upon exchange rate. These pairs of currencies are called FX pairs or currency pairs. The EURUSD currency pair, for example, is the Euro traded against the US Dollar.
How is FX traded?
FX is traded with leverage, which means using borrowed funds to control a larger position size than you could using your own capital. For example, with 1:50 leverage, a USD 1000 investment can control a position worth USD 50,000. While leverage can amplify profits, it can also amplify losses on a trade.
A number of factors can drive price movements in FX, including macroeconomic indicators, geopolitical events, interest rate differentials, market sentiment, as well as supply and demand dynamics. For instance, if a country’s economic data indicates strong growth, that country’s currency may appreciate relative to others.
Let’s say the EURUSD exchange rate is 1.2000 (which means 1 Euro is equivalent to 1.2000 US Dollars) and you buy at this level. You could buy 10,000 Euros for USD 12,000. If the Euro strengthens relative to the US Dollar, and the exchange rate increases to 1.2500, you can now sell your 10,000 Euros for USD 12,500, a profit of USD 500
What are the risks when trading FX?
When trading FX, it’s important to be aware of the potential risks. These include:
- Market risk: FX prices are subject to fluctuations, and traders may experience losses due to adverse movements in exchange rates. FX markets can be volatile, leading to sudden and significant price swings.
- Liquidity risk: During periods of high volatility – or when trading less frequently traded currency pairs – there could be difficulty in executing trades or obtaining favourable prices due to limited market depth.
- Counterparty risk: When dealing with other market participants, such as brokers or financial institutions, there is a risk that the counterparty may default on its obligations, leading to losses.
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Slippage may occur in fast-moving markets or when liquidity is low. Slippage is the difference between the expected price of a trade and the actual executed price.
Other FX trading risks include regulatory risks related to changes in regulations that can impact trading conditions; operational risks, involving potential issues with trading platforms, execution or trade settlement; and systemic risks, which can affect the entire financial system, such as global economic crises.
How much can you lose in FX trading?
When trading FX, your losses can be substantial and you could potentially lose more than your initial investment. A number of factors can impact losses, including the size of the position, market conditions and leverage, which can magnify losses significantly. For example, if you use 1:50 leverage and the market moves against your position by 2%, the resulting loss will be 100% of your initial investment.
What are the costs/charges involved in FX trading?
When you trade FX, you could face these potential costs or charges:
- The spread is the difference between the bid and ask price of a currency pair and represents the cost of entering a trade. The spread is dynamic and depends on market liquidity and the time of day, Market volatility affects FX prices at all times.
- Financing charges are incurred when you hold an FX position overnight. These charges are applied through swap points and reflect the interest rate differentials between the two currencies in an FX pair. The settlement date should be taken into account when factoring this in. For example, EURUSD has a settlement date of t+2.
- Commission fees may be charged on FX trades. The fees may be based on a percentage of the trade’s notional value or be a fixed amount per trade.
You may need to post additional collateral or margin if the value of your position declines or if margin requirements change.
Note that, as costs and charges may vary, it is always important to review the specific terms and conditions that apply to you.
Product and cost webpages
https://www.home.saxo/en-gb/products/forex
https://www.home.saxo/en-gb/rates-and-conditions/forex/trading-conditions
https://www.home.saxo/en-gb/rates-and-conditions/forex/spreads-and-commissions