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FOREX TRADING - SPOT FOREX FAQ's

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What is the forex market?

Forex is the Foreign Exchange Market, the largest financial market in the world, averaging a daily turnover of 1.5 trillion US Dollars. Forex may also be referred to as the 'FX market' or 'Forex Market'. All the currencies operate within a floating exchange rate, and the simultaneous buying and selling of different currencies is known as Forex trading. Currencies on the Forex market are always traded in pairs (Euro/Dollar etc) because the return for the investor is the relative exchange value of one currency against another currency.

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Does the forex market have a central location?

There is no central location where trading takes place in the forex market. A sizeable portion of forex trading takes place between the largest banks which deal with transactions for large governments and companies – this is known as the Interbank market. However, trading can take place between any two parties over the internet and via the telephone, 24 hours a day. Individual traders usually trade via a broker or dealer. The forex market is not regulated and can be described as an 'OTC' (Over the Counter) market. Because the forex market is referred to as the “forex spot market”, some may confuse it with futures or options. However, the forex is not within the futures or options market.

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Does the forex market have many different participants?

As the forex market has traditionally been populated by banks (for instance; investment banks, central banks and commercial banks) it is considered an 'Interbank' market. This is changing though, and the forex market is now expanding.

As well as private speculators, there has also been the inclusion of large multinationals, international money managers, brokers, futures and options traders and registered dealers.

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When does the forex market start trading?

The forex market is a 24h market, and as such, each trading day begins in Sydney. The market then continues to move as each business day dawns in every financial centre around the globe; from Tokyo to London to New York. Because it is a 24h market; investors can respond to fluctuations at the time they occur, day or night.

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In the forex market, which currencies are most commonly traded?

The most popular currencies include: the US Dollar, British Pound, Euro, Yen, Canadian and Australian Dollars and the Swiss Franc.

Over 85% of daily forex transactions will involve these major currencies. The Currencies that are most frequently traded are known as 'liquid', these will most commonly belong to the countries that have stable political situations (i.e. governments), low inflation and respected central banks.

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What does 'margin' mean?

Essentially, a 'margin' is the collateral for a forex position.

For instance, if the market makes a move against your position, your trader or investor will ask for more funds by means of a 'margin call'. They will immediately close out your open forex positions if there are insufficient funds.

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What are 'long' or 'short' positions on the forex market?

Every forex position requires one investor to go 'long' in one currency, and 'short' in the other. In trading speak; a 'long position' means that the trader has bought currency at a particular price and is aiming to sell it later on at a higher price; thereby benefiting from a rising market. A 'short position' means that the trader is selling a currency quickly in anticipation of it depreciating in value; thereby benefiting from a declining market.

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How is an 'intra-day' position different to an 'overnight fx position'?

An 'overnight fx position' is a position that is still on when normal trading hours end at 4:30 EST – these are then automatically rolled over to the next day's price at competitive rates (based on the currencies interest rate differentials). On the other hand, 'intra-day positions' are all the positions that are opened after the close of normal trading hours (anytime during the 24h period after 4:30 EST).

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What determines the currency prices on forex?

Currency prices on the forex market fluctuate for a variety of reasons. These tend to be a mixture of economic and political conditions such as, interest rates, inflation and political stability.

To influence the value of their currency, governments may even participate in the forex market to attempt raise or lower the price (by buying; in order to raise it, or by flooding the market with their currency; in order to lower it).

All or any one of these factors may affect forex currency prices, but because of the size of the market, it would be impossible for a single entity to 'sway' it for any length of time.

Unlike stocks, currency prices in the forex market tend to create trends, with fluctuations generally repeating themselves in relatively predictable cycles.

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Are there ways to manage risk with forex trading?

Yes, Stop loss orders and limit orders are the most commonly used tools in forex trading risk management. They are easily executed in main, due to the liquidity of the forex market.

If the market moves against an investors position - a stop loss order will limit potential losses by ensuring that a particular position will be automatically liquidated at a pre-determined price should the market move that way. Where as a limit order will place a restriction on the minimum price to be received or the maximum price to be paid.

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Is there a particular strategy I should use when trading forex?

Traders on the forex market use economic fundamentals and technical factors to make decisions, however the most dramatic movements can occur when an unexpected event happens (for instance; when a central bank raises domestic interest rates to the outcome of a war).

Often, it is not these events themselves that influence the market, but rather the expectation of the event, or it's outcome.

By interpreting a vast array of economic information such as news, government issued reports and indicators and even rumor, fundamentalists predict price movements.

To identify trading opportunities, technical traders will use mathematical analyses and numerous patterns to look at support and resistance levels, and trend lines.

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How frequently are trades made on forex?

Trading activity varies. This is generally dictated by the market conditions on that day, but you could say that on average a small to medium trader may make around 10 trades a day.

Traders may take positions as often as they wish because most brokers do not charge commission, meaning that there are no excessive transaction costs.

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For what length of time is a spot forex position maintained?

Generally speaking a forex trading position is maintained until one of three thing happen: it has realised sufficient profits, or a stop-loss order is executed, or the funds are needed for a better position.

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How expensive is forex trading?

There is money to be made in forex trading, and it is not relatively expensive. Forex trading can be as expensive or as worthwhile as you make it, as with any type of trading it is up to you how mush risk you are willing to shoulder.

Most commonly, an online forex broker will permit customers to perform margin trades at up to 100:1 leverage, so that an investor may execute trades of £100,000 with an initial margin requirement of £1000.

Whilst this type of leverage can mean that investors maximise their profit potential, it also means that their loss potential is equal. Depending on your risk appetite, you may want to be more cautious. A new investor should perhaps use a more sensible margin trade, such as 20:1 until they find their feet.

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If forex brokers don't charge commission, how do they make money?

Similarly to other traded products, forex trading entails the use of a bid/ask spread. This represents the prices at which your counterpart is prepared to trade, and your broker receives a slice of this bid/ask spread.

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How could I make money by trading forex?

In the forex market, you are actually doing two trades when you buy a currency (you are buying one currency and selling another). As opposed to the stock market, you have known all along what you are betting for and against (whereas on the stock market you only need to know one stock).

You rarely have to pay commission to forex brokers, the way they make money is by giving you a worse spread than the one they get, and then charging you interest on that margin. A spread will usually be two or three points (or 'pips'). A margin can range quite drastically. There is little regulation so online, it is fairly common to be accepted for a 200:1 margin, some firms will even offer you a 400:1 margin. Points, or 'pips' are how profits are measured in forex. (for instance; a pip is 1/1000 of a dollar).

With the market operating 24 hours a day, earning-wise, it would be easy to say that you can earn as much as you want. How much you earn and how fast you earn it will depend on the volatility of the market (i.e. how fast it moves up and down). A professional trader will earn 100 – 200 points a day which is equal to a 100 to 200% return.

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What do I need to start trading forex?

To start trading forex, you will need a broker. Once you have registered, they will provide you with the software that you need along with a list of currency pairs, graphs and technical indicators which are free to use. Many brokers will also let you 'practice' so that you can develop your skills.

You should try and use a combination of technical and fundamental approaches to forecast the market when trading forex. A technical approach means looking at statistical methods to gauge the market; a fundamental approach looks at country risk, i.e. up to date information on domestic product, interest rates and economic output.

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What is market transparency?

In a trading environment, market transparency is a highly desired entity. When a market is more transparent, it becomes more efficient and more investors can see better positions.

The forex market is transparent in comparison to other markets; the factors that are involved are in plain view, for instance; access to real-time research in relation to countries economic situation. Increased transparency means that as a forex trader, you have plenty of information at your disposal (i.e. technical and fundamental indicators) and so you will be more able to apply risk management strategies.

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What is instantaneous order execution?

Order execution in the forex market is instantaneous. Because order execution is all electronic (i.e. via internet platform) instantaneous order execution is routine.

Trading forex means you get the highest level of market transparency, and that means that there are no blockages, or hold ups when it comes to execution orders, generally you will get fill conformation within one or two seconds.

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