TRANSACTION,TRADE. ORDER, TRANSACTION, POSITION. TYPES OF ORDERS

LOT AND TRANSACTION

As we said before, the biddings at the financial markets are carried on with standardized by volume parts. These standard parts (volumes of supplies of financial instruments) are called lots. One standard lot at the Forex currency market is equal to 1 000 000 (one million) units of basic currency. For example, if we take currency pair EURUSD, then in buying transaction 1 000 000 (one million) euro will be obtained with corresponding quantity of dollars. If the price of buying is 1.38997, then 1 389 970 will be needed to obtain 1 000 000 euro.

Several lots make together total volume of transaction. For example, 10 lots is a volume that is equal to 10 000 000 (10 mln) units of obtained currency. Broker companies also give an opportunity to operate with fractional (mini- and micro-) lots. In particular, LiteForex company considers 100 000 as a standard lot and allows traders to open transactions at volume of 0.1  lots ( 10 000 units) and 0.01 лота (1 000 units).

And now let us meet with buy and sell transaction in details. Each transaction (also known as full transaction) consists of two transactions: opening and closing. Closing of the transaction is always an opposite action to the opening. For example, if a transaction was opened by a purchase, then it must be closed with a selling, and vice versa: if the opening of the transaction is a selling, then its closing will be a purchase. For more details read chapter 2.1 "Price and spread" part "Technical analysis".

TRADE. ORDER, TRANSACTION, POSITION. TYPES OF ORDERS

The process of trading at Forex may be divided into two parts: "Waiting" and "Trading". These parts interchange permanently. It is not possible to trade constantly (just because every strategy has periods when it makes sense to enter the market, and when it is better to be outside). However during the period of "Waiting" it is not necessary to idle. As a rule during "Waiting" trader makes an analysis of the market (see chapters II and III), keeps count and analyses his past transactions (correction of mistakes).

Here we will describe the process of trading in details and describe stages of life of any transaction. Each buying and selling operation in currency contract (sometimes it is called full transaction) consists of the following stages:

• setting order by trader (via electronic trading system of a broker company in order to do that or this action is sent; the types of orders will be described later);
• fulfillment of order by broker company (as a result of fulfillment of order) upon condition that the order is set correctly and can be fulfilled in current trade conditions, basically, a transaction takes place. 
• one or several such transactions (they are called opened transactions or opened orders) compose the position of a client at the market.
• position has so-called "floating " result - it reflects at such characteristic as "Means"
• while order is still opened, a trader may that or this way modify it;
• transaction is closed with that or this order, and the operation of closing of a deal is always opposite to the operation of an opening;
• as a result of closing of transaction its financial result reflects in balance, and record is added to the history (statement), where it transforms into closed order.

Described life cycle of an operation is the ideal variant that is shown on the picture. In reality it must be take into consideration that not all setting orders bring to the opening of transaction. Fulfillment of an order also has its nuance. Besides the closing of the transaction can be declined because of the situation where the quantity of available means at the deposit is not enough for supporting the position (margin call or stop-out), and not as a result of a fulfillment by a broker an order, set by a trader. In our course however we will not describe all the details. It is a task of other special courses of our company.

General types of orders:

• market is an order of trader to broker to fulfill a transaction for current market price. We can mark out next subtypes of market order:
  • marketbuy - to open a transaction for purchasing at current price ask;
  • marketsell - to open a transaction for purchasing at current price bid;
  • marketclose - to close a transaction at current market price (purchase transactions are closed with selling at bid price, selling transactions are closed with purchase at ask price);
• gtc (pending order) - order to broker to fulfill a transaction under some conditions. There are next types of pending orders:
  • Buy stop - to open a purchase transaction under condition that the price overcomes certain level in order in its movement from bottom to top (to buy at trend);
  • Buy limit - to open a purchase transaction under condition that the price  reaches a certain level in its movement from top to bottom (to buy at kickback);
  • Sell stop - to open a purchase transaction under condition that the price overcomes a certain level in its movement from top to bottom (to sell at a trend); Picture 3: The difference between line and exponential profit; 
  • Sell limit - to open a purchase transaction under condition that the price reaches a certain level in its movement from bottom to top (to sell at kickback);
• stoploss (pending order, that does not exist separately from "basic" order position) - order to broker to close position after reaching a certain level of losses (to cut losses). For purchase position stoploss can be only below the current price, and for the selling position stoploss can be only higher the current price. In case if there is a floating profit in the position, then stoploss order may be set in the loss area at the level of opening (this will bring to result when the transaction reliably will not be unprofitable), and in profit area (this will allow to close the position if floating profit will start to decrease);
• takeprofit (pending order, that does not exist separately from "basic" order position) - order to broker to close position after reaching a certain level of profit. This order allows to fix a floating profit in the position, reflecting it in balance. For purchase position takeprofit may be only higher than current price, and for selling position - only lower than current price. In case if the current result in the position is unprofitable, then takeprofit may be set both in loss area (this will allow to close transaction as soon as profit will decrease) and opening level (this will allow to bring the transaction to the position when it will be profitable).

It is recommended to meet with corresponding statements about regulations of realization of the trading operations of your broker, to learn more about types of orders and about peculiarities (conditions) of its fulfillment.

CURRENCY PAIR

To make it easier to understand which positions are opened, a concept of currency pair at Forex market was introduced. Instead of saying "I have bought euro for dollar" or «I have sold euro for dollar" traders use shorter phrases: "To buy euro-dollar" or "To sell euro-dollar" (respectively). Let us see what currency pair is in details.

The record of currency pair is an abbreviation of names (in compliance with ISO 4217 standard) of relative currencies that stand one after the other (without spaces, but sometimes with right slash "/"). For example, currencies euro (EUR) and dollar (USD) make together a currency pair EURUSD (euro-dollar). Buying this currency pair means buying euros for dollars. Always in any case regardless of currencies in the pair, the first of them is bought with the second one. Thus the AUDCAD buying means the buying of the Australian dollars for the Canadians ones. Likewise the EURUSD selling means the selling of euro for dollars. 

Using professional language, the first currency pair is the basic one, and the second is the quoted one. Thus in NZDUSD pair the basic currency is the New Zeeland dollar (NZD) and the quoted one is the American dollar (USD).

When examining the list of currency pairs (for example, in client terminal MetaTrader4 by LiteForex company in the window "Market review"), it should be mentioned that there are financial instruments where basic currency is the American dollar (for example, USDJPY, USDCHF, USDCAD). In this case it is said that direct quoting takes place (it shows the quantity of units of the quoted currency in one American dollar). In the same time, the American dollar is a quoted currency in some other pairs (for example, EURUSD, GBPUSD, AUDUSD, NZDUSD). It is called back quoting. The value of price in this case should be interpreted as quantity of dollars in one unit of basic currency.

Of course by means of simple mathematical transformation it is not difficult to get USDEUR currency pair from EURUSD. Indeed, lets EURUSD price in some time period will be 1.39224. Then 

 — will be the USDEUR price.

Why there are no such financial instruments in quoted lists of the largest broker companies? - It is just a historic tradition.

The currency pairs listed above: USDJPY, USDCHF, USDCAD, EURUSD, GBPUSD, AUDUSD, NZDUSD make the group of so-called "majors" - they are united by the presence of the American dollar in each of them. They are high liquid financial instruments that are characterized by significant volatility and ability to change greatly, and thus have great potential for making profit.

There are other groups of instruments. If, for example, the basic currency is the Australian dollar, and the quoted one is the Canadian dollar, then this cross-rate is AUDCAD. So-called cross-rates are divided into "major crosses" and "minor crosses" according to their liquidity on the financial markets. 

Furthermore, there are different groups of financial instruments, it is noted that the separate currencies can play that or this typical role more frequently. In particular the currencies of more stable countries and also contracts on precious metals (USDCHF, USDJPY, XAUUSD, XAGUSD) may be financial instruments and the investments that can permit to wait safely till the crisis on the markets is over. Using trade jargon, these instruments are called "refuge-currency". The currency of countries in export structure of which the raw materials prevail, are usually called raw material currencies (for example, USDCAD, AUDUSD).

ADVANTAGES OF FOREX

As it was already mentioned, due to high liquidity Forex allows to change without any difficulties practically all volumes of one currency to another. Moreover, high liquidity means that a transaction might be closed practically immediately. It is achieved due to two reasons. Firstly, the trading is carried out via electronic means, secondly, every moment the market is full with big number of buyers and sellers that in accordance create the highest demand and equitable supply. However liquidity and volumes are not the only advantages of Forex.

Working with Forex you have a possibility to choose when and how long you are going to work and when and how long you are going to have a rest, fun, to study or communicate with friends and relatives etc. Your profit depends only on you. It does not depend on your boss or your stuff, your business partners, supplies, terms, goods or services. There is seasonality at Forex but it does not influence your profit. You can choose the appropriate profitable tactics for every time period. You do not spend money on advertisement of your goods or services, you do not look for buyers, you are not obliged to certificate or license your production, and all this brings your overhead and commercial expenses to naught.

You will need a PC or a mobile device (laptop, tablet PC) with the net access for your work. This is all. LiteForex will supply you with special software for free. You can work in your apartment, dealing-room, Internet-cafe, to put it simply, in any place with Internet access. With the help of Internet data card you can choose a comfortable place for your work in any place of the world.

Apart from these there is one more advantage of Forex. Having fix profit on a percentage base (for example, 30% per month) your profit in absolute term will grow with the increase of your capital. Mathematicians proved that having a positive (no matter how small it is) mathematical expectancy of trade strategy, with the help of means of money management it is possible to provide anexponential growth of deposit. 

Picture 3: The difference between line and exponential profit

In case of using the advisors in trade (EA), this type of profit may be regarded as passive profit. It means that once you create the conditions for gaining the profit, you just get it regardless of your work. 

MARGIN TRADING

Financial markets are an economic system where its participants trade in specific goods - financial instruments. The system includes such participants as banks (that can play the role of market-makers), exchanges, broker companies, financial instruments (for example, funds) and individual traders. The goods that are sold by the participants, are called financial instruments or assets. In the most general sense, financial instruments are certain obligations (contracts) that prove facts of mutual demands of two parties. The first party is obligated to supply (immediately or in future, unconditionally or on certain conditions) goods, and the second - to pay (for example, with money or securities).

An important feature of the financial markets is that the money or securities themselves might be regarded as goods. But of course common (usual) goods and raw materials are also sold at the financial markets. On the basis of it the financial markets may be divided into foreign exchange markets, stock markets and raw materials markets.

An important feature of the financial markets is that the money or securities themselves might be regarded as goods. But of course common (usual) goods and raw materials are also sold at the financial markets. On the basis of it the financial markets may be divided into foreign exchange markets, stock markets and raw materials markets.

Picture 1.  Types of financial markets

In our course we will pay general attention to foreign exchange market Forex and its participants, including broker companies and individual traders. Roles and functions of others participants of the financial markets (banks, exchanges, financial institutions) are widely described in other sources (see The List of Recommended Literature) and also in other (special) courses of our company.

The other feature of the financial markets is standardization of volume of transactions (size of contracts) by means of lots. At the Forex exchange market a standard contract (one lot) is equal to 1 000 000 (one million) units of acquired currency. In the reality such volumes are sold very seldom at Forex. More typical situation is when the transaction has a volume of ten (10 000 000 units) or more lots.

Such a volume of deals is not always available for an individual investor. The broker companies that provide their services to Forex (for example, LiteForex), give an opportunity to individual traders to carry out operations at the foreign exchange market Forex providing them with so-called leverage. It goes like this. A trader opens an account in the company (sometimes it is called a secure deposit). This deposit is used as a bail (margin) that provides a guarantee of the client ability to pay to the broker company.

When a transaction is opened, a certain part of means, that becomes a guarantee of the transaction (margin), is frozen on the client’s account. The broker company, from its part, adds means, increasing the sum by 50, 100, 200 or 500 times. Basically, it is a purpose loan provided to the client by the broker company for the full time of life of transaction Some companies provide such a credit at certain interest or charge a certain commission, but LiteForex provides the leverage to its clients for free. The size of the leverage in this case is indicated as 1:50; 1:100; 1:200 or 1:500. Using the leverage, an individual trader may enter Forex having relatively small deposit. Thus if a trader has $10 000, then using the 1:100 leverage, the biggest possible amount of the transaction that is available for him is equal to 1 000 000 (one million dollars).

Picture 2. The work of leverage

Apart from leverage broker companies provide an opportunity to trade using cent accounts and work with fractional lots. In this case a trader gets an opportunity to work with deposits from US$1 (at cent account it is equal to 100 units) that by means of leverage will allow him to open a transaction at volume of 10 000 (0,1 of lot); the transactions at volume of 10 000 or less are called fractional (mini-, micro-) lots. Broker companies cannot lead such micro-transactions at the foreign exchange market separately. Thus in case of work with cent accounts, the consolidated position is led to the market.