Common questions about FOREX
1. What is Forex?
- Forex is an interbank market that took shape in 1971 when global trade shifted from fixed exchange rates to floating ones. This is a set of transactions among Forex market agents involving exchange of specified sums of money in a currency unit of any given nation for currency of another nation at an agreed rate as of any specified date. During exchange, the exchange rate of one currency to another currency is determined simply: by supply and demand – exchange to which both parties agree.
2. How to trade over the Internet?
- FXOpen clients may place trades manually from the MetaTrader terminal or use an Expert Advisor (a robot) – an automated trading strategy which trade the Forex market 24/7 without any user intervention. Executing trades via the Internet is made easy by FXOpen. Just download and install the MetaTrader platform and log in to your account. To place an instant Market Order, enter the volume (number of lots) in the New Order window, then click Sell (BID price) or Buy (ASK price). Your deal is then automatically executed by the dealing software which will calculate the margin requirement, and if there is sufficient margin funds available in the account, the deal is confirmed online within just a few seconds (instantly on ECN/STP accounts!). The open order will then appear in your trading terminal, window Terminal, tab Trade and its floating Profit/Loss will be updated automatically according to the current market conditions.
3. How do I make a profit in Forex?
- Example 1: USD/GBP. Let's say your deposit is $3,000 and your leverage is set at 1:500. Through this leverage, your buying power on the market is actually $1,500,000. From your analyses, you are expecting the US$ to rise against the major currencies. You decide to SELL 0.10 lots ($1 per pip) of the GBP/USD pair at the market price of 1.8000 and since you only want to risk 10% of your account, you set your stop loss order at 1.8300 (300 pips or $300 risk) 12 days later the GBP/USD quote is 1.7540 and you decide to close your SELL position. Your profit in pips is (1.8000 - 1.7450) 550 pips. Since you chose to trade 0.1 lots volume, and the value per pip is $1. You made a profit of $550 on this trade.
Example 2: USD/JPY. Let's say your deposit is $2,000 and your leverage is set at 1:200. Through this leverage, your buying power on the market is actually $400,000. From your analyses, you are expecting the US$ to fall against the major currencies. You decide to SELL 0.20 lots ($2 per pip) of the USD/JPY pair at the market price of 111.10 and since you only want to risk 10% of your account, you set your stop loss order at 112.10 (100 pips or $200 risk) A week later the USD/JPY quote is 109.15 and you decide to close your SELL position. Your profit in pips is (111.10-109.15) 195 pips. Since the value per pip is $2, you made a profit of $390 on this trade.
4. How fair is the Forex market?
- It is said to be the fairest market on earth because it is so large and there are so many participants that no single player, not even a large government, can completely control the direction of the market.
5. Where is the central location of the Forex Market?
- The Forex market is not controlled by a centralized exchange as with stock and futures markets. The Forex market is an Over the Counter (OTC) market as transactions are made via the Internet from many different locations 24 hours a day, 5 days a week.
6. 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 due to the popularity and availability afforded by internet trading, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators.
7. 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. The market is open 24/5.
8. What are the most commonly traded currencies in the Forex market?
- 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:
- US Dollar (USD);
- Euro (EUR);
- Japanese Yen (JPY);
- British Pound (GBP);
- Swiss Franc (CHF);
- Canadian Dollar (CAD);
- Australian Dollar (AUD).
9. What does it mean have a long or short position?
- A long position is one in which a Forex trader buys a currency at one price and aims to sell it later at a higher price, when he closes a position. The trader is benefiting from a rising market.
A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this case the trader is benefiting from a declining market.
It’s important to realize that the trader opens a long position for one currency and the short position for another.
10. What affects the prices of currencies?
- Currency prices (exchange rates) 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 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 entity to drive the market for any length of time.
11. How much profit can actually be made?
- Naturally results can and do vary among individuals and no guarantees can be made as to profitability. Some markets for instance the Japanese Yen have been known to move 400 pips in one day. If you calculate that 1 pip is equal to approximately $7.8 per lot and you entered the market favoring that move, even if you only got in halfway through that move, you would have made quite a substantial profit. But, and this is a big “but”- you need to be aware that the risks of Forex trading can be substantial, that results do vary from person to person, and that the knowledge and experience that each one has is different.
12. I am interested in Forex trading, but would like some additional information. Any suggestions?
- In order to gain a practical understanding of foreign exchange trading, there is no better way than to open a Forex demo account, where you can experience what it’s like to trade the Forex market without risking any capital.
13. How do I manage risk when I trade currencies?
- 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 sets a particular position to be 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.
14. 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.