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1) What is a Currency pair? How to trade FX?

In broadest term, Foreign Exchange is commonly referred to as FX, forex, currencies, currency pairs etc.

Every FX price is quoted based on a pair of currency products. For instance, USD/JPY at the rate of 110.00 means USD1 is equivalent to JPY110 at that specific time when this price is made. At some time later, if the price goes into higher rate, it means the appreciation in value in USD relatively to JPY, and vice versa.

In a FX quote, the first currency is referred to as the base currency whereas the second currency is the counter currency. It is always a standard that the whatever base currency is quoted as 1 unit in relatively to the denomination of its counter currency. Today, the 4 FX majors that are commonly traded in global market are USD/JPY, USD/CHF, EUR/USD, GBP/USD. Of course, traders can trade any other currency pairs accordingly to their needs so long as there is a made market for it.

To trade FX, a buyer who generally wishes to buy may satisfy himself by executing his bid in 3 ways:

1) queue below the market  2) join the best bid in the market  3) take the market best offer

Alternatively, a seller who wishes to sell may do so by executing his offer in 3 ways:

1) queue above the market  2) join the best offer in the market  3) give to the market best bid

These are the 3 basic strategy of actions to enter market beside few other ways like OCO order, stop loss, stop entry, limit and discretionary order etc.

By standard, all per entry of a FX order is always based on 100,000 units in base currency. For instance, a trader buys 1 contract ("1 lakh") of USD/JPY means he is willing to pay USD100,000 in exchange of JPY at the agreed rate of transaction, or vice versa. Nevertheless, in FX trading, this trader does not need to physically produce that mentioned amount size in order to trade. All he has to do is open a trading account with a licensed merchant broker and deposit a margin to play this game. Margin deposit is regulated by the merchant broker generally from 2-3% of the notional amount to be traded.

Each smallest unit movement is known as a "pip" (Price Interest Point). For instance in USD/JPY again, 110.20 to 110.35 means a 15 pips movements. The movement range will come up to JPY15,000  profit whenever the contract is transacted in per order of USD100,000 (1 lakh).

Over recent years, many merchant brokers also cater mini FX trading in order to satisfy the needs of small but enormous retail market. In mini FX trades, per contract ("0.1 lakh") is based on 10,000 units of based currency, which is 10 times smaller size of a regular FX contract. So every unit movement of profit/loss will become 0.1 pip which is USD1 for USD denominated pair and JPY100 for JPY denominated pair.

To trade FX successfully, a trader has to look primarily into 2 factors before anything else. First of all, the spread of FX quotation given to them at all time is usually from 1 pip to 10 pips difference. Look for a merchant broker that can give you the narrower spread the better. For instance, it is wiser to trade with a broker ABC that quotes you price of USD/JPY at 110.25B /26A (that means 25 bid and 26 offer), than to trade with broker XYZ that at that same time quotes you  USD/JPY at 110.24B / 28A (that means 24 bid and 28 offer).

The second most important point none to other is the liquidity. Since FX market is a decentralized market, every merchant broker or market makers can quote their price to their own circle group of traders. It will be disadvantageous to traders whenever a trader wants to hit a good price in market breakout movements or to cut loss fast, when the merchant broker does not supply a good price or rich liquidity (ready volume) for him to enter the market or cut loss.

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2) What is a Futures contract? How to trade them?

Futures contracts are also known as derivatives. They can be derived from any underlying product so long it has high demand and supply factors. In broadest term, a futures product can be anything ranging from tangible or intangible nature. Every Futures exchange in the global market may host their own bucket of in-house products with good back up of essentials like central regulatory body, clearing house facilities, licensed member firms,  retail and institutions participations, market makers, market liquidity etc.

Unlike FX, a Futures market is a centralized marketplace. All global orders are required to go through the licensed member firms in order to be executed. Transactions will then be sent to clearing house for matching and clearance before the trading margins of all customers are adjusted accordingly at the close of every market day.

A Futures contract has standard specifications including the notional value, product symbol, per tick value of fixed fluctuation range, month of expiration, settlement mode, daily market operation time, margin required for each contract etc. The only variables left for traders to decide are the price and quantity that they wish to transact.

Basically, there are 3 types of players in futures market ie. speculators (both individuals and corporations), hedgers and arbitragers.

The primary purpose of Futures trading is for the relevant business operators to reduce their risk exposure by appropriate hedging activities. Hedging activities allow the business operators to cover / reduce their unnecessary losses in the near future when they are exposed from holding current commodities. Speculators and arbi-traders take advantage of price difference and make quick profits by engaging in profitable trades. The requisites of such participation is to open an account with a licensed member firm and deposit trading margin before commencement of trade.

The wide spectrum of all Futures contracts include agricultural commodities futures, financial futures, equities futures, energy futures, debt instrument futures, precious metal futures etc.

All margin trading activities including FX and futures participation bears unlimited potential of reward as well as unlimited potential of loss. Taking it on as a gamble is largely discouraged.

To succeed in such business activities, traders are encouraged to tighten in few personal areas eg. risk appetite, market knowledge, trading skills, risk management control, good support of information access etc before they commence trading.

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3) What is a Binary Trade? Is it a fair play game?

Binary trading is gradually becoming popular in ASIA. It was believed that such trading method originated from sports book betting in UK at the turn of the new millennium. Many new traders preferred this type of trading platform without the need to analyze too much of the movement market. Whatever they staked on the trade was simply about winning or losing i.e. settlement price of market above or below the level that they bet on.

To a certain level of similarity, Binary trade is just like taking a position in option trading. For instance, if your broker house offers you a bet on the settlement price of current market day, comparatively to previous day's closing price, there will be a bid/offer quotes (premium to be paid) for you to buy on speculation of settlement price to be above the bet level. Likewise, you can also choose to buy on speculation of settlement price to be lower than the bet level. The extreme outcome of the index quote at the end of the result will be either at 100 (if you are correct) or 0 (if you are wrong). Hence, you will win the trade or lose all of the premium. All or Nothing!

Premium of Binary trade to be paid = tick value x index quote given x no. of contracts

Trade Sample:

A contract XYZ has per tick value of USD5. Previous day closed at 14500. Currently day trading level is at 14370 and it is 3 hours to market closing. The Binary index quote at this point of time is given as 10.25 B / 10.75A for the bet to settle above 14500. If a trader buys 10 contracts on this bet, he will pay USD5 x 10.75 x 10 = USD537.50.

At the end of the day, if the market settles above 14500 whereby the index will be at 100. Then his take-home profit will be USD5 x 100 x 10 = USD5000.00

Alternatively, If the market settles below 14500, then the trader will lose all the premium used to pay for this trade.

There are many ways to play Binary trading depending on difference of prices in inter-day trade, intra-day time bracket trade etc. Nevertheless, it is not just a blind speculation of up or down betting like in a casino game. Binary trade depends much on foresight and experience in judging market movements, likelihood of inter-day candlestick formation and short-term trend reading. In any case, a trader is able to square off his position with a profit /loss even before the final settlement of Binary index, whenever he feels a change in market sentiment or just to engage in scalping activity.

It is indeed slightly easier to trade in Binary market, bearing in mind the maximal loss is the premium to be lost. It also scales down to a trader's major decision whether the market will happen or will not happen to fall in his favor. However, caution is needed to be exercised lest multiple small losses can be accumulated if the trader does not have good analytical mind.

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4) What is a Hedge (Bona-fide hedging)?

This is a specialized trade practiced by producers, manufacturers or exporters in order to protect their portfolio invoices from the risk of fluctuation of commodities price or currency value. Commodities involved can be anything of agricultural, metals, energy etc.

For example, a producer enters into a forward trade agreement with a buyer to transact 100 ton of palm oil, to be delivered in 90 days. Upon delivery (90 days later), the commodity (cash) price usually fluctuates and differs from the strike price entered 90 days ago. Therefore, a hike in the price will result in intangible loss to the producer as he could have sold at better (higher) price now. This loss of income can be recovered if he would have entered into a futures trade 90 days ago to hedge against this price fluctuation. Alternatively, a drop in the commodity price upon delivery will create profit which has been locked in 90 days ago. But the execution of a futures trade then, will neutralize this profit from cash price gain.

Therefore, hedging is a good protection to even out whatever possible loss or gain for the producer; but not hedging it will become a definite gamble against a straight loss or straight gain! Moreover, the gradual and continual rise of most commodities will sure make sense for the sellers to enter into a good hedge. Due to the uncertainties to the prices scaled over months, the seller's gain means a loss to the buyer and vice versa. Therefore, it is essential for both parties to hedge in futures market in order to cover their individual unwanted exposure (classified as a form of risk)!

In the broadest term, commodities that can be hedged include anything that are listed from robusta coffee (agriculture), sugar (agriculture), lumba (timber), pork (meat), cattle (meat), soya (grain), rice (grain), rubber (latex), gold (metal), copper (metal). silver (metal), aluminum (metal), crude (energy), natural gas (energy) etc. etc.

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