Introduction to Foreign Exchange (Forex)

While the foreign exchange (Forex) market is the world's most heavily traded financial market, it remains a relatively emerging investment product for the majority of individual investors compared to traditional financial instruments such as stocks, futures, and bonds. This is because most investors lack in-depth understanding of the Forex market and its price fluctuations. Unlike traditional securities and futures products traded on exchanges like the New York Stock Exchange (NYSE) and the Chicago Mercantile Exchange (CME), Forex is a global financial product traded 24 hours a day. Forex trading starts daily according to New Zealand time, followed by trading sessions corresponding to Asian, European, and American time zones respectively. In the past, only banks and non-bank financial institutions conducted large-volume transactions in the Forex market to seek speculative profits or hedge against currency interest rate risks. The global Forex market has grown extremely rapidly in recent years. As a powerful Forex broker, MaceMarkets is honored to provide stable and reliable Forex trading platforms for various financial institutions (such as funds, asset management companies, and wealth management firms) as well as a large number of individual investors.

What is Forex Trading?

For active investors and traders, Forex trading is similar to other financial investment products like stocks, commodity futures, and bonds. Given today's economic globalization and regional economic alliances, including Forex trading as part of your investment portfolio helps balance investment risks and increase profit opportunities.

Just like financial products such as futures, Forex trading allows investors and traders to go long (buy) or short (sell) currency pairs, such as EUR/USD, USD/JPY, GBP/USD, and so on.

The price of a currency pair represents the value of one currency relative to another, reflecting the current relative market values of the two currencies. Political and economic factors of the countries issuing the currencies will affect the value of the respective currencies.

Positive factors such as a country having relatively stable and low inflation/interest rates, a strong gross national product (GNP), and political stability will have a positive impact on the value of its currency. Through research on Forex price volatility, capital allocation management, and trading discipline, successful investors can reap substantial profits from Forex trading.

Liquidity in Currency Trading

Similar to securities and bonds, liquidity varies among different currencies. Highly liquid currencies are those issued by the 7 countries with the most stable political and economic conditions: the United States, Japan, the United Kingdom, France, Germany, Italy, and Canada. After the European Union began issuing the euro (EUR), the most liquid currencies are the US dollar (USD), Japanese yen (JPY), British pound (GBP), euro (EUR), and Canadian dollar (CAD). The trading volume of these 5 foreign currencies accounts for 80% of the global daily Forex trading volume.

Base Currency and Quote Currency

In the Forex market, exchange rates of two currencies are quoted in pairs. The base currency comes first, followed by the quote currency, separated by a "/". When calculating the price of the currency pair, the base currency is treated as a fixed constant, while the quote currency is the variable in the exchange rate. The euro (EUR) serves as the base currency against all other tradable currencies, such as EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD, etc. The British pound (GBP) acts as the base currency against all currencies except the EUR, such as GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD; only when paired with the euro is it quoted as EUR/GBP.

Currency Value

For example, in the EUR/USD pair, EUR is the base currency. If an investor buys 100,000 EUR/USD, it means they are purchasing 100,000 euros while selling US dollars. Regardless of how the exchange rate changes, the value of 100,000 EUR remains unchanged. However, the value of the quote currency (USD) will fluctuate with the exchange rate.

Currency exchange rates are quoted with a minimum precision of four decimal places, which is called a "pip". Forex uses pips to reflect price changes because Forex trading typically offers high leverage, which amplifies the actual trading capital amount—even small price movements can result in profits or losses.

MaceMarkets provides a default leverage ratio of 1:200 for standard accounts. When trading with this ratio and an EUR/USD exchange rate of 1.14000, a contract for 100,000 euros requires a margin of 500 US dollars. Since 100,000 EUR = 114,000 USD, and 114,000 / 500 = 228, the exact leverage provided for the EUR/USD currency pair is 228:1.

USD Value = 1.14 x Face Value of Base Currency = $114,000
The pip value for the above transaction can be calculated using the following formula:
USD Value = 1.14 x Face Value of Base Currency = $114,000

Basics of Forex Trading

Buying and Selling in Forex

In reality, you are essentially buying one currency while selling another simultaneously. For example: if you place an order for EUR/USD at a price of 1.14000, it means you are buying euros and selling US dollars at 1.14000. If the exchange rate of EUR against USD rises, your trade will be profitable.

If you encounter a situation where you cannot trade through the MaceMarkets platform, please call our company's traders to place an order. You need to provide information in the following format:
"I buy 100,000 Euros and sell the dollar at the Market" OR
"I buy 500,000 EUR/USD on a 1.15000 stop" OR
"I buy 100,000 Euros vs. the Dollar at the market"

Please note that when placing an order through a trader, you must specify the transaction value, currency pair, exchange rate price, and the type of order (market price, limit price, or stop price) as well as whether it is a buy or sell order.

Bid Price and Ask Price

Like trading other financial products, Forex quotes consist of a bid price and an ask price. The bid price is the price at which the dealer buys the currency. The ask price is the price at which the market maker sells the currency. For traders, the opposite applies: the dealer's bid price is the trader's sell price, and the dealer's ask price is the trader's buy price.

The difference between the bid price and the ask price is called the spread. The spread is a fee charged by the market maker to provide and ensure liquidity for Forex trading (buying and selling) to individual traders. For example, if the bid/ask price is 1.14501/1.14506, the spread is 0.5 pips.

Dealers are always willing and able to create a liquid market for investors. For their services, they will have a bid price when buying stocks, an ask price when selling stocks, and a quotation. The spread between the bid and ask prices provided by the dealer fluctuates based on the general liquidity of the underlying stock.

The spreads offered by MaceMarkets for major currency pairs are generally around 1-2 pips. Currencies with lower liquidity will have slightly wider spreads. This reflects the relevant liquidity and risks of specific currency pairs in the professional market. The spread quotes for our trades reflect the risks we bear in a trading market and the costs we incur in providing services to clients.