Spot and forward trading

When you trade foreign exchange you are normally quoted a spot price. This means that if you take no further steps, your trade will be settled after two business days. Due to the fact that the EU investment directive does not presently covering spot foreign exchange trading we will, however, require you to swap your trade forward at least another two business days. This ensures that your trades are undertaken subject to supervision by regulatory authorities for your own protection and security. If you are a commercial customer, you may need the convert the currencies for international payments. If you are an investor, you will normally want to swap your trade forward to a later date. This can be undertaken on a daily basis or for a longer period at a time. Often investors will swap their trades forward anywhere from a week or two up to several months depending on the time frame of the investment.
Although a forward trade is for a future date, the position can be closed out at any time - the closing part of the position is then swapped forward to the same future value date.

Interest Rate Differentials
Different currencies pay different interest rates. This is one of the main driving forces behind foreign exchange trends. It is inherently attractive to be a buyer of a currency that pays a high interest rate while being short a currency that has a low interest rate.
Although such interest rate differentials may not appear very large, the significance is much greater in a highly leveraged position. As an example, the interest rate differential between the US dollar and the Japanese yen for much of 1997 was approximately 5 %. In a position that can be supported by a 5 % margin deposit, this results in a 100% profit on capital per annum when you buy the US dollar. Of course, an even more important factor normally is the relative move in the value of the currencies, that approximated some 20% from high to low during 1997. But still, you have an advantage of 100% per annum in your favour by being long US dollar, and an initial disadvantage of the same size by being short.Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions!
Such a situation clearly benefits the high interest rate currency and as result, the US dollar was in a strong bull market all through 1997. But it is by no means a certainty that the currency with the higher interest rate will be strongest. If the reason for the high interest rate is runaway inflation, this may undermine confidence in the currency even more than the benefits perceived from the high interest rate.

Stop-loss discipline
As you can see from the description above, there are significant opportunities and risks in foreign exchange markets. Aggressive traders might experience profit/loss swings of 20-30% daily. This calls for strict stop-loss policies in positions that are moving against you.
Luckily, there are no daily limits on foreign exchange trading and no restrictions on trading hours other than the weekend. This means that there will nearly always be an opportunity to react to moves in the main currency markets and a low risk of getting caught without the opportunity of getting out. Of course, the market can move very fast and a stop-loss order is by no means a guarantee of getting out at the desired level.
But the main risk is really an event over the weekend, where all markets are closed. This happens from time to time as many important political events, such as G7 meetings, are normally scheduled for weekends.
But for speculative trading, we would always recommend the placement of protective stop-losses. With Saxo Bank Internet Trading you can easily place and change such orders while watching development graphically on your computer screen - which we believe is a unique feature in on-line trading today.