A Forex deal is a contract agreed upon between the trader and the market-maker (i.e. the Currency Trading Platform). The contract is comprised of the following components:
- The currency pairs (which currency to buy; which currency to sell)
- The principal amount (or “face”, or “nominal”: the amount of currency involved in the deal)
- The rate (the agreed exchange rate between the two currencies).
Time frame is also a factor in some deals, but this chapter focuses on Day-Trading (similar to ‘Spot‘ or ‘Current Time’ trading), in which deals have a lifespan of no more than a single full day. Thus, time frame does not play into the equation. Note, however, that deals can be renewed (‘rolled-over’) to the next day for a limited period of time.
The Forex deal, in this context, is therefore an obligation to buy and sell a specified amount of a particular pair of currencies at a pre-determined exchange rate.
FX trading is always done in currency pairs. For example, imagine that the exchange rate of EUR/USD (euros to US dollars) on a certain day is 1.1999 (this number is also referred to as a ‘spot rate‘, or just ‘rate’, for short). If an investor had bought 1,000 euros on that date, he would have paid 1,199.00 US dollars. If one year later, the Forex rate was 1.2222, the value of the euro has increased in relation to the US dollar. The investor could now sell the 1,000 euros in order to receive 1222.00 US dollars. The investor would then have USD 23.00 more than when he started a year earlier.