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| Currency Trading | A two-way contract between a party delivering currency and the second party that offers another currency, based on an agreed exchange rate is the part of a spot deal. Two days within the deal date are called settlement date.
Speculators often use a rollover swap, which is designed change an old deal date to the current one. It can be carried out by closing simultaneously the open position for today’s date and opening the same position for the next one at a price which reflects the interest rate differential between both currencies.
The worth of the currency pair, primarily is close to zero. In case of buying it is caused by selling the quote currency in order to buy an equivalent quantity of the base currency. But the value of the currency pair position will always change in accordance to market fluctuations. Therefore, if the rate for the currency pair decreases, the long position of the speculators will decrease in value as well and become negative. In case if market position caused losses, banks or dealers demand from the speculator to give margin – a collateral to cover those losses.
To lessen the risk of price decrease traders often establish a Stop-Loss rate for each open trade. It determines the trade’s automatic closure when the currency exchange rate for the currency pair comes to the limit. For long positions, this rate is always lower than the current exchange rate; for short ones, it is constantly higher. Traders also often establish for their trades a Take-Profit rate which will lock in a profit when the exchange rate comes to a definite limit. For long positions, such rate must be higher than the current rate, and for short ones, it must be lower.
A trader also has an option to leave the bank, broker or dealer an order. So called leave orders are orders to execute the trade under certain market conditions. There are three types of leave orders:
1. entry orders: defines a certain exchange rate that a currency pair must reach to be traded. These orders are used in case if the trade would not offset a current position.
2. take-profit orders: clear a position by buying (or selling) the currency pair when the exchange rate comes to a determined level.
3. stop-loss orders: clear a position by buying (or selling) the currency pair when the exchange rate comes to a determined level.
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