How FX Is Traded — course checkpoint

Sixteen lessons on one page.

Spot and settlement

An FX trade exchanges cash for cash, both legs in full principal, on a value date two business days out — a business day in both settlement centres. USD/CAD settles T+1. The value date rolls at 17:00 New York, which is why Wednesday carries three days of carry.

Full principal on both legs is why FX carries settlement risk — Herstatt, 26 June 1974 — which CLS answers with payment-versus-payment. And there is no exchange and no official price: a tiered dealer network, last look, the FX Global Code, and a 4 p.m. London benchmark averaged over five minutes.

• Notional = lots × 100,000 × rate (in the quote currency)
• Pip value = lot size × pip size — USD 10 per lot on a four-decimal USD pair
• Round-trip spread cost = spread in pips × pip value

Forwards, swaps and NDFs

A forward is spot with a later value date, priced by arithmetic and not by forecast:

• F = S × (1 + r_quote × t) ÷ (1 + r_base × t)
• Points ≈ S × (r_quote − r_base) × t × 10,000 — accurate inside six months, drifting a few pips at a year
• The higher-yielding currency trades at a forward discount, always

The spine: spot 1.0800, USD 4.50%, EUR 2.50%, three months → forward 1.08537, points 53.7. Hedging forward and replicating it with a loan, a spot trade and a deposit gave the same euros — that is covered interest parity.

An FX swap is a near leg plus a reversing far leg: no currency exposure, collateralised borrowing across currencies, priced in points. EUR 10,000,000 for three months cost USD 53,700 ≈ 1.99% annualised — the rate gap exactly. Over 40% of all FX turnover, and it rolls every retail position nightly.

An NDF settles net in dollars against a fixing: Notional × (Fixing − Contract) ÷ Fixing. USD 1,000,000 at 1,350 against a 1,380 fixing paid USD 21,739. Arbitrage is blocked, so NDF pricing can leave parity behind, and that gap prices devaluation risk.

Listed FX and the retail account

Futures are forwards standardised and cleared — fixed sizes, quarterly expiries, an inverted quoting convention; forwards still win on exact amounts, exact dates and no daily cash calls. Options are quoted in volatility, with named expiry cuts; payoffs and the Greeks are in the Derivatives domain.

A retail position is a rolling spot contract that never settles, with the broker as counterparty, carrying four charges: spread, commission, the overnight roll and currency conversion.

• Leverage = Notional ÷ Margin
• Move to total loss = 1 ÷ L; close-out at a 50% rule = 1 ÷ (2L)
• At 30:1 on EUR/USD: 360 pips to ruin, 180 to close-out. At 50:1: 216 and 108
• Daily roll = Notional × (r_base − r_quote − markup) ÷ 360
• Annual roll as a share of margin = Leverage × the all-in differential

One lot, a 2% differential plus a 1% markup, is USD 9 a day — about 91% of a USD 3,600 margin over a year, before a single adverse tick. When the differential is smaller than the markup, both sides pay.

Execution reality

The London/New York overlap is the deep water; the 17:00 roll and scheduled data are the thin spots. A spread worth 0.0074% of notional can be 30% of a short objective.

A stop is an instruction to trade at the next available price. On 15 January 2015 there was no next available price for roughly 30% — nine deposits at 30:1, fifteen at 50:1 — producing an insolvency and an industry-wide bill. Quiet is not safe: a suppressed rate stores risk rather than removing it.

The two facts stated plainly

1. Retail FX is leveraged, and the documented loss statistics are consistent. ESMA's samples found roughly 74%–89% of retail accounts lost money, and mandated firm disclosures commonly sit in the 70s and 80s percent. A base rate, stated as information.
2. Losses are not capped by the deposit. Gaps can exceed a stop. Negative balance protection, where it applies, caps the loss at the account balance rather than the margin — and your entity determines whether it applies.

This course never suggested trading FX, using leverage or opening an account. Figures are rounded and illustrative, cases sourced to public reporting, regulation described generically — rules differ by jurisdiction and change. Nothing here is legal, tax or investment advice.

Before you sit it

Each of these is a minute at your desk. Any one that is not names the lesson to reopen first.

• Say when a spot FX trade actually settles, and why it is not today — Why does spot settle two days later?
• Say what forward points are made of — How do you compute and read forward points?
• Say how much margin one standard lot needs at 30:1 — How much money does one lot actually require?
• Say what happens to a stop order when there is no price at all — What happens when there is no price at all?

Try it now

1. Build one complete forward on paper: real euro-dollar spot, the two currencies' real overnight reference rates, three months. All three are below. Compute the outright and the points, then check them against the approximation.

2. Build one complete retail position on the same pair at that spot: notional, margin at 30:1, pip value, close-out distance in pips, daily roll at the real differential plus a 1% markup, and the annual roll as a share of margin.
3. Write the two sentences that close this course honestly — one on what leverage multiplies, one on what a stop does and does not guarantee. Neutral, factual, free of any recommendation.

Checkpoint quiz next. Nothing in these sixteen lessons was a recommendation to trade currencies or to use leverage — the mechanics and the arithmetic are a skill, not a signal.