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What is Forex

  1. What is the "Foreign Exchange", or "Forex", or "FX" for short?

    This is the largest financial market in the world. Its daily average turnover is approximately US$1.5 trillion. Foreign Exchange trading simply means the simultaneous buying of one currency, and selling of another. The world's currencies are on a floating exchange rate. They are always traded in pairs – for example, Dollar/Yen, Euro/Dollar, etc.

  2. Is there a central location for this market?

    No. Unlike stock and futures markets, FX trading is not centralized on any one exchange. It is considered to be an Over-the-Counter (OTC), or 'Inter-bank,' market. This is because transactions are conducted between two counterparts over the telephone, or via an electronic network.

  3. Who are the participants in this market?

    'Inter-bank market' means that it was dominated by banks up until recently – i.e., central banks, commercial banks, investment banks, etc. However, thanks to market makers brokers, other market players then entered the market in record numbers. They include international money brokers, large multinational corporations, registered dealers, global money managers, private speculators, and futures and options traders.

  4. When is this market open for trading?

    This is a true seamless 24-hour, seven-day-a-week, market. Trading begins each day in Sydney, and then moves around the world, as each financial center opens up – Tokyo, London, and then New York – in that order. The big advantage to trading the forex market is that traders like you and I can respond to currency fluctuations caused by economic, political or social events as they unfold – day or night. This is much unlike other financial markets, as you well know.

  5. Which currencies should I trade in this market?

    The most commonly traded are those that are 'liquid' – i.e., those of countries with stable governments, low inflation, and respected central banks. Over 85% of all trading activity revolves around the major currencies – i.e., the Australian Dollar, British Pound, Canadian Dollar, Euro, Japanese Yen, Swiss Franc, and the U.S. Dollar

  6. Do I need a lot of money to trade this market?

    No. One market maker broker we know of requires a minimum deposit of $500, although it is preferable that you start with at least US$2,000 to US$5,000 in your trading account. You can execute margin trades with up to 200:1 leverage, and you can also execute trades of $10,000 with an initial margin requirement of $50, in some cases.

  7. What is margin?

    Margin is just that – collateral for a position. Your market maker broker will request additional funds by way of a "margin call," if the market moves against your position. It will immediately close out your open positions, if there are insufficient funds in your account.

  8. What are long or short positions?

    A long position is one in which you buy a currency at one price, with the expectation of selling it later on at a higher price. Obviously, you anticipate that the market will rise. A short position is one in which you sell a currency with the expectation of buying it back at a lower price. Here, you expect the market to fall. Every FX position you take automatically entails going long in one currency, and short the other. If you buy one, by default you are shorting the other.

  9. What is the difference between intraday and overnight positions?

    Intraday positions are those positions you would take during the 24-hour period, after the market maker broker’s normal trading hours open, but not hold after the close. Overnight positions are those of your positions that are still on at the end of normal trading hours. Your market maker broker rolls over your positions at competitive rates (based on the currencies’ interest rate differentials) to the next day's price.

  10. What drives currency prices?

    Currency prices are affected by a variety of economic and political conditions – most importantly inflation, interest rates, large market orders, and political climate. Furthermore, governments sometimes enter the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency to lower its price, or conversely by buying it to give it a boost. This is commonly called “central bank intervention.” Any of these factors can cause volatile currency prices. However, the sheer size and volume of the Forex market makes it virtually impossible for any one entity to "influence" the market for any length of time.

  11. How should I manage risk?

    The most common risk management tools in Forex trading are the limit and stop loss orders. A limit order restricts the maximum price to be paid, or the minimum price to be received. A stop loss order ensures that your position is automatically liquidated at a predetermined price, should the market move against you. Limit order and stop loss orders can easily be executed due to the huge liquidity of the Forex market.

  12. How often should I trade?

    Market conditions will dictate your trading activity on any given day. The average small-to-medium trader could conceivably trade up to 10 times a day. However, because there are no commissions when you trade currencies on the Forex, you can take long or short positions as often as you like, without worrying about excessive transaction costs.

  13. How long should I maintain my positions?

    In general terms, you will keep your position on until, 1.) you realize sufficient profit from your position; 2.) your stop-loss is triggered; or, 3.) another position with greater potential comes up, and you need to free up funds from another trade to take advantage of it.

  14. How can I overcome my fears?”

    There is no better way for you to get practical experience in this market than for you to open a demo account with a market maker broker that we would recommend to you. That way, you will get a feel for what it’s like to trade the Forex market, without actually risking any of your hard-earned capital.

  15. What is the spot rate, and what is the spot market? What exchange does it trade on?

    In your daily newspaper, you will find quotations for the forward rate, options, and the spot rate on currencies. The spot rate means that currencies can be exchanged for delivery in two days – i.e., on the spot. The word market is misleading, in that there is no central location where trading currencies takes place. The bulk of Forex trading is conducted between approximately 300 large international banks, which process transactions for large companies and governments. These institutions continuously provide prices for each other, and their corporate and institutional clients. Forex trading is not bound to any one trading floor, but takes place electronically within a network of banks continuously over a 24-hour period.

  16. What do the terms bid/ask and spread mean?

    Bid is the highest price that the seller is offering for a particular currency at the moment; ask is the lowest price acceptable to the buyer. Together, the two prices constitute a quotation; the difference between the two is called the spread.

  17. What is price shifting?

    Price-shifting is the practice of offering a client a buy or sell price that does not reflect where the market is actually trading. The shift is always to the advantage of the broker, and the purpose is obvious. The practice is common and, unfortunately, legal.

  18. What is Over The Counter (OTC) trading?

    A market conducted directly between dealers and principals via a telephone and computer network rather than a regulated exchange trading floor. OTC trading with means that you trade currencies with the aim to earn a profit, though you can lose as well. You don’t actually take delivery of these currencies.

  19. What is a Limit Order?

    A limit order is where you nominate a rate at which you want to open a deal. When and if this rate occurs in the market, your ‘reserved’ deal is automatically opened. Once the deal is opened it is treated like a Day Trade with the details appearing in My Account.  This saves you watching the market every minute to see whether the rate you want happens.

  20. How do I know which currency will go up or down?

    International currency prices are highly volatile and very difficult to predict. Due to such volatility, there is no system that can assure you that transactions on the foreign currency market should result in great benefits to you, nor is it possible to guarantee that your transactions would yield favorable results. By different ways of technical analysis, you increase the propabilities of success.

  21. Is the Forex market regulated?

    Yes, check that your broker is regulated in your region

  22. Is Forex risky?

    Yes, we advise all traders  that foreign exchange trading does involve substantial amount of risk

  23. What should I look for in an online trading platform?

    There are many online platforms available to trade with. Some key points to look for in the platform you choose:

    • level of personal service and support – live chat, SMS services
    • personal training
    • trading tools offered including charts, outlooks, news, financial calendars
    • user friendly platform – can you do everything online or do you need to download software
    • how quickly can you can start trading
    • easy deposit methods – e.g. e-wallets such as credit cards, Wire Transfers
    • 24 hour access to your account
    • leverage offered
    • tailor-made accounts and spreads
    • real-time exchange rates
    • no hidden costs – commissions on deposits or withdrawals
    • no maintenance margins
    • cost of renewal/rolling fees for Day Trades
    • fixed rates and stop loss limits
    • security and safety of the site and your information
    • a company that has a regulatory license for your region
    • genuine company with real people in real offices around the world.
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