An Introduction to Forex (FX)
Overview:
IB offers market venues and trading platforms which are directed towards both forex-centric traders as well as traders whose occasional forex activity originates from multi-currency stock and/or derivative transactions. The following article outlines the basics of forex order entry on the TWS platform and considerations relating to quoting conventions and position (post-trade) reporting.
Background:
A forex (FX) trade involves a simultaneous purchase of one currency and the sale of another, the combination of which is commonly referred to as a cross pair. In the examples below the EUR.USD cross pair will be considered whereby the the first currency in the pair (EUR) is known as the transaction currency that one wishes to buy or sell and the second currency (USD) the settlement currency.
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Creating a quote line
The steps for adding a currency quote line on the TWS are as follows:
1. Enter the transaction currency (example: EUR) and press enter.
2. Choose the product type forex
3. Select the settlement currency (example: USD) and choose the forex trading venue.
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Notes:
The IdealPro venue provides direct access to interbank forex quotes for orders that exceed the IdealPro minimum quantity requirement (generally 25,000 USD). Orders directed to IdealPro that do not meet the minimum size requirement will be automatically rerouted to a small order venue principally for forex conversions. Click HERE for information regarding IdealPro minimum and maximum quantities.
Currency dealers quote the FX pairs in a specific direction. As a result, traders may have to adjust the currency symbol being entered in order to find the desired currency pair. For example, if the currency symbol CAD is used, traders will see that the settlement currency USD cannot be found in the contract selection window. This is because this pair is quoted as USD.CAD and can only be accessed by entering the underlying symbol as USD and then choosing Forex.
Creating an order
Depending on the headers that are shown, the currency pair will be displayed as follows;
The Contract and Description columns will display the pair in the format Transaction Currency.Settlement Currency (example: EUR.USD). The Underlying column will display only the Transaction Currency.
Click HERE for information regarding how to change the shown column headers.
1. To enter an order, left click on the bid (to sell) or the ask (to buy).
2. Specify the quantity of the trading currency you wish to buy or sell.
For example, an order to buy 100,000 EUR.USD will serve to buy 100,000 EUR and sell the equivalent number of USD based on the displayed exchange rate.
3. Specify the desired order type, exchange rate (price) and transmit the order.
Note: Orders may be placed in terms of any whole currency unit and there are no minimum contract or lot sizes to consider aside from the market venue minimums as specified above.
Common Question: How is an order entered using the FX Trader?
Position (Post-Trade) Reporting
FX position information is an important aspect of trading with IB that should be understood prior to executing transactions in a live account. IB's trading software reflects FX positions in two different places both of which can be seen in the account window.
1. Market Value
The Market Value section of the Account Window reflects currency positions in real time stated in terms of each individual currency (not as a currency pair).
The Market Value section of the Account view is the only place that traders can see FX position information reflected in real time. Traders holding multiple currency positions are not required to close them using the same pair used to open the position. For example, a trader that bought EUR.USD (buying EUR and selling USD) and also bought USD.JPY (buying USD and selling JPY) may close the resulting position by trading EUR.JPY (selling EUR and buying JPY).
Notes:
The Market Value section is expandable/collapsible. Traders should check the symbol that appears just above the Net Liquidation Value Column to ensure that a green minus sign is shown. If there is a green plus symbol, some active positions may be concealed.
Traders can initiate closing transactions from the Market Value section by right clicking on the currency that they wish to close and choosing "close currency balance" or "close all non-base currency balances".
2. FX Portfolio
The FX Portfolio section of the account window provides an indication of Virtual Positions and displays position information in terms of currency pairs instead of individual currencies as the Market Value section does. This particular display format is intended to accommodate a convention which is common to institutional forex traders and can generally be disregarded by the retail or occasional forex trader. FX Portfolio position quantities do not reflect all FX activity, however, traders have the ability to modify the position quantities and average costs that appear in this section. The ability to manipulate position and average cost information without executing a transaction may be useful for traders involved in currency trading in addition to trading non-base currency products. This will allow traders to manually segregate automated conversions (which occur automatically when trading non base currency products) from outright FX trading activity.
The FX portfolio section drives the FX position & profit and loss information displayed on all other trading windows. This has a tendency to cause some confusion with respect to determining actual, real time position information. In order to reduce or eliminate this confusion, traders may do one of the following;
a. Collapse the FX Portfolio section
By clicking the arrow to the left of the word FX Portfolio, traders can collapse the FX Portfolio section. Collapsing this section will eliminate the Virtual Position information from being displayed on all of the trading pages. (Note: this will not cause the Market Value information to be displayed it will only prevent FX Portfolio information from being shown.)
b. Adjust Position or Average Price
By right clicking in the FX portfolio section of the account window, traders have the option to Adjust Position or Average Price. Once traders have closed all non base currency positions and confirmed that the market value section reflects all non base currency positions as closed, traders can reset the Position and Average Price fields to 0. This will reset the position quantity reflected in the FX portfolio section and should allow traders to see a more accurate position and profit and loss information on the trading screens. (Note: this is a manual process and would have to be done each time currency positions are closed out. Traders should always confirm position information in the Market Value section to ensure that transmitted orders are achieving the desired result of opening or closing a position.
We encourage traders to become familiar with FX trading in a paper trade or DEMO account prior to executing transactions in their live account. Please feel free to Contact IB for additional clarification on the above information.
Other common questions:
Currency Conversion for Trading Products in a Non-Base Currency
How to convert a currency if you wish to trade products in a currency other than the currency your account was initially funded in
For additional information on currency conversions please refer to the Knowledge base articles:
Why Are There Two Currencies Shown When Trading Forex and How Do They Work?
What Happens if I Trade a Product Denominated in a Currency Which I Do Not Hold in My Account?
Will cash balances be converted once the designated Base Currency for the account has been changed?
It is important to note that changing your Base Currency does not serve to convert existing cash balances or change the denomination of a security into any other currency. Cash balances will remain in their currency of denomination unless converted via IB's IdealPro (for balances of at least USD 25,000 or equivalent) or odd lot (for balances below USD 25,000 or equivalent) Forex venues. Similarly, the denomination of securities and commodities positions cannot be changed as this is determined by the listing exchange.
Glossary terms:
Can I convert a long cash balance to a non-base currency or trade a position denominated in a non-base currency in my cash account?
Overview:
Yes, albeit, with certain limitations. IB provides cash accounts the ability to trade products denominated in a currency other than the designated base currency of the account as long as the account is classified as a multi-currency cash account (i.e., maintains Forex trading permissions). To trade a security denominated in a non-base currency, the account holder must either first deposit the appropriate currency into their account or perform a currency conversion via the IdealPro venue. Regardless of the method selected, one needs to ensure that a sufficient balance of the appropriate currency exists in order to cover the purchase price of the applicable security including commissions prior to submitting the order or it will be rejected. This implies that IdealPro currency conversions must settle prior to the converted funds being available for a subsequent transaction (e.g., if you are converting USD into EUR for the purpose of purchasing a EUR denominated stock, you would not be able to enter the stock order until the conversion trade had settled two business days later).
Individuals trading futures in a cash account should note that futures variation is settled in cash and any variation which serves to generate a cash deficit in any given currency type (i.e. variation exceeds available cash margin) will result in a forced position liquidation in an amount sufficient to eliminate the cash deficit.
Finally, note that cash accounts are restricted from holding a short balance in any non-base currency as this would constitute a margin loan. In addition, clients of IB India are not allowed to maintain a multi-currency cash account and may only maintain assets which are denominated in INR.
Why does the Cash Report section of my statement reflect a reduction in cash despite no trade activity or withdrawals?
Overview:
The Cash Report section details how each period's cash balance changes from beginning to end. If your account holds a long or short balance in a non-base currency, such balances will be translated (but not converted) into your base currency for statement reporting and account equity aggregation purposes. The rates at which these non-base balances have been converted are detailed in the Exchange Rates section located towards the bottom of your Daily Activity Statement. All other things being equal, any change in an exchange rate from one statement period to another will result in either an increase or decrease in your ending cash balance with the net change across all non-Base currencies being reflected in the Cash FX Translation Gain/Loss line. This does not reflect a realized gain or loss on these open currency positions but rather a mark-to-market calculation across statement periods.
Glossary terms:
