Foreign exchange (Forex or FX) is one of the most exciting, fast-paced markets

around. Until recently, trading in the Forex market had been the domain of large
financial institutions, corporations, central banks, hedge funds and extremely
wealthy individuals. The emergence of the internet has changed all of this, and
now it is possible for average investors to buy and sell currencies easily with the
click of a mouse.

Daily currency fluctuations are usually very small. Most currency pairs move less
than one cent per day, representing a less than 1% change in the value of the
currency. This makes foreign exchange one of the least volatile financial markets
around. Therefore, many speculators rely on the availability of enormous leverage
to increase the value of potential movements.

Terminology:

Currency-pair: In Forex, you always come across a currency-pair and not a single
currency. You can only buy or sell a pair.

 Base Currency: The currency that you have to buy if you long a currency
pair or sell if you short a currency pair. Example for USD/INR pair of
currency, USD is the base currency.
 Buying a pair is referred to as ‘Longing’; selling is referred to as
‘Shorting’. So if you long a currency-pair it implies that you have to buy
the base currency and short a currency pair implies that you have to sell the
base currency..
 There will be two different prices which the market fixes for the Currency-
pair. These are:
o Ask Price – This is the price you will have to pay to long a currency-
pair.
o Bid Price - This is the price you will get when you short a currency-
pair.

Lots: In the foreign exchange market, the fluctuations are very small. So to
increase the quantum of the transaction, you will be dealing in lots. Example: In
the game, 1 Lot = 1000 currency-pairs, for instance if you long 1 lot, it means that
you are longing a 1000 currency-pairs. You always deal in bulks referred to as
lots.

Leverage: It is a multiplying factor. It increases the amount of risk associated to

each transaction.
Margin: It is the amount that you have to pay up if you long a pair or the amount
that you will get on shorting a pair. In forex, margin is the minimum required
balance to place a trade. When you open a forex trading account, the money you
deposit acts as collateral for your trades. This deposit, called margin, is typically
1% of the value of the position .

Balance: It reflects your financial status after one complete round trip of a
transaction i.e. after closing a particular currency pair. It will only change when
you close a transaction. The profit or loss is added or subtracted respectively from
the Balance after each round-trip.

Equity: It shows your instantaneous net worth. It will be your balance (financial
status) if the transaction is closed just at that point of time taking into accounts
the profit or loss that you make.

Percentage: It is calculated by dividing equity attained after closing the

transaction with margin. To long or short a pair the percentage should not be less
than 50. It provides a check so that the participant may not buy too many
currency pairs.

How to play?

We take an example. Suppose you choose to deal in USD to INR 39.50/5 (bid
price =39.50, ask price= 39.55).

Long

You select 2 lots and a leverage of 100 and you decide to long the pair.

As you have to long the pair you have to pay the margin based on ask price at that
point of time. This can also be viewed as buying the base currency at the ask
price. Let this ask-price be 39.55 INR.

Now if you wish to close the transaction at this point itself then you will get back
money on the basis of bid price. So your profit or loss is calculated on the basis of
the difference between the ask price when you long the pair and bid price at that
point of time when you close the transaction. This difference is multiplied with
the no. of lots and the leverage. Now this is the profit or loss you would make in
INR. However, we must convert it to USD ( all profit calculations should be in
base currency i.e. USD) by dividing it by the bid price at the time of closing the
transaction. This gives you the profit or loss on one complete transaction when
you long your pair.

Example:

Initially let us suppose that at our balance= 2500000 USD,

equity= 2500000 USD

Suppose you choose to deal in USD to INR 39.50/5 (bid price =39.50, ask price=
39.55).

We want to long 2 lots of the above pair i.e. 2x1000 USD.

Let us take leverage as 1:100

Let the ask-price = 39.55 INR and bid-price = 39.50 INR.

Now margin= 1% of no. of lots x 1000 x leverage x ask-price

=1/100 x 2 x 1000 x 100 x 39.55 INR

=79100 INR

This is the amount we have to pay as margin.

Now balance remains the same. (Note that the balance changes only in a round
transaction). Equity will change and will reflect our balance (financial status) if
we were to close the deal at the instant itself.

Now if we wish to close the transaction just after we opened it, the ask price and
bid price remain the same. (bid price =39.50, ask price= 39.55).

So our profit in USD= no. of lots x 1000 x leverage x (bid price – ask price)/ bid
price

= 2 x 1000 x 100 x ( 39.50 – 39.55)/39.50

= - 253.16 USD
Now new balance= 2500000 – 253.16 USD

= 2499746.84 USD

Equity = Balance = 2499746.84 USD

Short

Consider again the pair:

Suppose you choose to deal in USD to INR 39.50/5 (bid price =39.50, ask price=
39.55).

Suppose you select 2 lots and a leverage of 1:100 and you decide to short the pair.

As you have to short the pair you have to sell the base currency i.e. USD in this
case, at the bid price. Let this bid price be 39.50 INR. For understanding, view it
as if you sold USD and acquired INR at a conversion rate of 39.5

Now if you wish to close the transaction at some point of time, then you will have
to sell the INR to get back dollars at a certain conversion rate. This conversion
rate shall be the ask price at the time of closing the transaction. Hence your profit
or loss is calculated on the basis of the difference between the bid price when you
short the pair and ask price when you want to close the transaction. Again, this
difference is multiplied with the no. of lots and the leverage. Now this is the
profit or loss you would make in USD, so it does not need any conversion. This
gives you the profit or loss on one complete trip of the transaction . This would be
clear with the help of an example:

Example:

Initially let us suppose that at our balance= 2500000 USD,

equity= 2500000 USD

Suppose we are dealing with USD-INR pair..

We want to short 2 lots of the above pair i.e. 2x1000 USD.

Let us take leverage as 1:100

Let the ask-price = 39.55 INR and bid-price = 39.50 INR.

Now balance remains the same. Equity will change and will reflect our balance
(financial status) if we were to close the deal at the instant.

Now if we wish to close the transaction at the same ask price and bid price.

Now since we were dealing in selling our base currency i.e. USD, so the profit
remains in USD and hence needs no conversion.

So our profit in USD= no. of lots x 1000 x leverage x (bid price – ask price)

= 2 x 1000 x 100 x ( 39.50 – 39.55)

= - 10000 USD

Now balance= 2500000 – 10000

= -2490000USD

Equity = Balance = -2490000 USD

Why the profit shown just after opening a position always negative?

The moment you open a transaction, your profit shown is negative because the
ask price of a currency pair is always more than the bid price at an instance of
time. So if you long a pair means that you buy the base currency at a higher price.
Hence if you wish to close the transaction as soon as you buy it, your profit
shown will be negative because the bid price at the time of closing the position
shall always be less than the ask price at the point of opening the position in this
case.

How to earn money?

To make profit in Forex you have to wait till your bid price at a point of time
becomes greater than the ask price at which u bought your base currency in case
you long a pair. In case of short you would make profit if the ask price at a point
of time becomes less than the bid price at which you sold the base currency.
Commodity Trading
Commodity markets are markets where raw or primary products are exchanged.
These raw commodities are traded on regulated commodities exchanges, in which
they are bought and sold in standardized contracts.The trading of commodities
consists of direct physical trading and derivatives trading.
Trading on exchanges in China and India has gained in importance in recent years
due to their emergence as significant commodities consumers and producers.