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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.
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Where is the central location of the Forex Market? |
Forex
Trading is not centralized on an exchange, as with the stock and
futures markets. The Forex 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.
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Who are the participants in the Forex 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.
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When is the Forex 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.
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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 Forex
markets would be 20:1 but ultimately depends on the investor's appetite
for risk.
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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.
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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 Forex
position requires an investor to go long in one currency and short the
other.
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What about terms like "bid/ask", "spread", and "rollover"? |
Please check
our extensive Glossary for detailed definitions of
all Forex related terms.
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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 (based on the currencies interest rate differentials) to
the next day's price.
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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.
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How do I manage risk?
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The
most common risk management tools in Forex 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.
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What kind of forex 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.
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How often are trades made?
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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, because most Forex Brokers don't charge
commission, traders can take positions as often as necessary
without worrying about excessive transaction costs.
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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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What is a Limit order? |
A
limit order is an order with restrictions on the maximum price to be
paid or the minimum price to be received. As an example, if the current
price of USD/YEN is 117.00/05, then a limit order to buy USD would be
at a price below 117.05. (ie 116.50).
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What is a Stop Loss order? |
A
stop loss order is an order type whereby an open position is
automatically liquidated at a specific price. Often used to minimize
exposure to losses if the market moves against an investor's position.
As an example, if an investor is long USD at 156.27, they might wish to
put in a stop loss order for 155.49, which would limit losses should
the dollar depreciate, possibly below 155.49.
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