Forex Trading FAQ
What is Foreign Exchange?
Where is the central location of the FX Market?
Who are the participants in the FX Market?
When is the FX market open for trading?
What are the most commonly traded currencies in the FX markets?
Is Forex trading expensive?
What is Margin?
What does it mean have a 'long' or 'short' position?
What about terms like "bid/ask", "spread", and "rollover"?
What is the difference between an "intraday" and "overnight position"?
How are currency prices determined?
How do I manage risk?
What kind of trading strategy should I use?
How often are trades made?
How long are positions maintained?
1
What is Foreign Exchange?
The Foreign Exchange market, also referred to as the "Forex" market,
is the largest financial market in the world, with a daily average turnover of
approximately US$1.2 trillion. Foreign Exchange is the simultaneous buying of one
currency and selling of another. The world's currencies are on a floating exchange
rate and are always traded in pairs, for example Euro/Dollar or Dollar/Yen.
2
Where is the central location of the FX Market?
FX Trading is not centralized on an exchange, as with the stock and futures
markets. The FX market is considered an Over the Counter (OTC) or 'Interbank'
market, due to the fact that transactions are conducted between two counterparts
over the telephone or via an electronic network.
3
Who are the participants in the FX Market?
The Forex market is called an 'Interbank' market due to the fact that
historically it has been dominated by banks, including central banks, commercial
banks, and investment banks. However, the percentage of other market participants
is rapidly growing, and now includes large multinational corporations, global
money managers, registered dealers, international money brokers, futures and
options traders, and private speculators.
4
When is the FX market open for trading?
A true 24-hour market, Forex trading begins each day in Sydney, and moves
around the globe as the business day begins in each financial center, first
to Tokyo, then London, and New York. Unlike any other financial market, investors
can respond to currency fluctuations caused by economic, social and political
events at the time they occur - day or night.
5
What are the most commonly traded currencies in the FX markets?
The most often traded or 'liquid' currencies are those of countries with
stable governments, respected central banks, and low inflation. Today, over
85% of all daily transactions involve trading of the major currencies, which include
the US Dollar (USD) , Japanese Yen (JPY) , Euro (EUR) , British Pound (GBP),
Swiss Franc (CHF) , Canadian Dollar (CAD) and the Australian Dollar (AUD).
6
Is Forex trading expensive?
No. Most online Forex brokers allow customers to execute margin trades
at up to 100:1 leverage. This means that investors can execute trades of $100,000
with an initial margin requirement of $1000. However, it is important to remember
that while this type of leverage allows investors to maximize their profit
potential, the potential for loss is equally great. A more pragmatic margin
trade for someone new to the FX markets would be 20:1 but ultimately depends on
the investor's appetite for risk.
7
What is Margin?
Margin is essentially collateral for a position. It allows traders to
take on leveraged positions with a fraction of the equity necessary to fund the
trade. In the equity markets, the usual margin allowed is 50% which means an
investor has double the buying power.
In the forex market leverage ranges
from 1% to 2%, giving investors the high leverage needed to trade actively.
8
What does it mean have a 'long' or 'short' position?
In trading parlance, a long position is one in which a trader buys a
currency at one price and aims to sell it later at a higher price. In this scenario,
the investor benefits from a rising market. A short position is one in which
the trader sells a currency in anticipation that it will depreciate. In this
scenario, the investor benefits from a declining market. However, it is important
to remember that every FX position requires an investor to go long in one
currency and short the other.
9
What about terms like "bid/ask", "spread", and "rollover"?
Forex Central has an extensive Glossary that provides detailed definitions of all Forex related terms.
10
What is the difference between an "intraday" and "overnight
position"?
Intraday positions are all positions which are opened and closed anytime
during normal trading. Overnight positions are positions that are still on
at the end of normal trading hours, which are usually rolled over by your Forex
broker to the next day's price.
11
How are currency prices determined?
Currency prices are affected by a variety of economic and political conditions,
most importantly interest rates, inflation and political stability.
Moreover, governments sometimes participate in the Forex market to influence the
value of their currencies, either by flooding the market with their domestic
currency in an attempt to lower the price, or conversely buying in order to raise
the price. This is known as Central Bank intervention. Any of these factors,
as well as large market orders, can cause high volatility in currency prices.
However, the size and volume of the Forex market makes it impossible for any one
entity to "drive" the market for any length of time.
12
How do I manage risk?
The most common risk management tools in FX trading are the limit order and
the stop loss order. A limit order places restriction on the maximum price to
be paid or the minimum price to be received. A stop loss order ensures a particular
position is automatically liquidated at a predetermined price in order to
limit potential losses should the market move against an investor's position. The
liquidity of the Forex market ensures that limit order and stop loss orders
can be easily executed.
13
What kind of trading strategy should I use?
Currency traders make decisions using both technical factors and economic
fundamentals. Technical traders use charts, trend lines, support and resistance
levels, and numerous patterns and mathematical analyses to identify trading
opportunities, whereas fundamentalists predict price movements by interpreting
a wide variety of economic information, including news, government-issued indicators
and reports, and even rumor. The most dramatic price movements however,
occur when unexpected events happen. The event can range from a Central Bank
raising domestic interest rates to the outcome of a political election or even
an act of war. Nonetheless, more often it is the expectation of an event that drives
the market rather than the event itself.
14
How often are trades made?
Market conditions dictate trading activity on any given day. As a reference,
the average small to medium trader might trade as often as 10 times a day.
Most importantly, by most online Forex brokers not charging commission, most
customers can take positions as often as necessary without worrying about excessive
transaction costs.
15
How long are positions maintained?
Approximately 80% of all forex trades last seven days or less, while
more than 40% last fewer than two days. As a general rule, a position is kept open
until one of the following occurs: 1) realization of sufficient profits from
a position; 2) the specified stop-loss is triggered; 3) another position that
has a better potential appears and you need these funds.
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