What is Forex trading?
Forex, Foreign Exchange Market, is an international exchange market where
currencies from all around the world are traded. It involves buying and selling
different currencies of the world.
Forex market is the largest trade market in the world, yielding $1.9 trillion
daily. It is traded all around the world but United States, Japan, United
Kindom, and Europes have the most active Forex traders.
How Forex trading works?
Forex is often traded in pairs, for example USD/Euro, USD/JPY, Euro/JPY,
GBP/CHF, and CAD/USD. You get 'short' in one currency and you will get 'long' in
the other one. Unlike conventional stocks market, Forex trading does not have a
centralized trade market.
It is considered as Over-the-Counter or Inter-bank as trades are done between
two counterparts via electronic network or telephone connections. Forex works
truly as a 24-hour market.
Everyday Forex trade begins when the financial centers in Sydney start their
day, and moves around the globe to Tokyo, London, and then New York. Traders can
always response to the market regardless of the local time.
How high are the risk in Forex trading?
The risks of losing money in Forex trading is high, but it is controllable via
proper education and trading system. Trading system is a must in Forex trading.
Charts, graphs, or pivot points are handful to indicate the right time to enter
or exit the market. An 'automated system', such as make your easierAs in any
trade market, discipline, control of emotion, and money management are the
traits needed to be succeed in Forex trading.Rewards
in Forex trading can be very lucrative if traders manage their risk nicely.
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.
Forex vs traditonal stocks/mutual funds trading: How does they match up?
Forex and conventional stocks are different type of trading. When trading Forex,
most trader's objectives are to predict short term movement in the currency
exchange values. Most Forex tradings are done in day-trading style where traders
will buy and sell in the same day. Different from Forex, stocks and mutual funds
trading are more to long term style where trades may last for years or even
decades!
What are the major traded currencies?
Major traded currencies are United States dollars, Australian Dollars, Japanese
Yens, British Pounds, Swiss Francs, Canadian Dollars, and the Euro Dollars.
Who are the major players in Forex trading?
According to Wall Street Journal Europe, 73% of the trade volume is covered by
Deutsche Bank, who covered 17% of the total currency trades; followed by UBS,
Citi Group, HSBC, Barclays, Merril Lynch, J. P. Morgan Chase, Coldman Sachs, ABN
Amro, and Morgan Stanley.
What tools do i need to start trading Forex?
It does not need a lot to start trading Forex: a funded Forex account and a
computer with Internet connections are basically sufficient for you to start
trading foreign currencies. However, proper Forex education and systematic
trading tools are highly recommended to minimize your risks in Forex market.
Also, beginner traders are advised to start off their trading in Forex with a
demo account first. A demo account is an account set up with 'play' money for
the purpose of training and shapen your trading skills. It's free to open a demo
account with most of the Forex online brokers and it does not risk your real
money in the trades.
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.
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.
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, because most Forex Brokers don't charge commission, traders can
take positions as often as necessary without worrying about excessive
transaction costs.
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.
What about terms like "bid/ask", "spread", and "rollover"?
Please check our extensive Glossary for detailed definitions of all Forex
related terms.
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.
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).
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.
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.
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.
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.
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. 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.
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.
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.