About the Forex Market

What is Foreign Exchange aka the Forex Market?  For more information, visit Wikipedia – Foreign Exchange Market 
The Foreign Exchange market, also referred to as the “Forex” or “FX” market is the largest financial market in the world, with a daily average turnover of approximately US $5.0 trillion. Foreign Exchange is simultaneous the 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.

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.

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.

When is the best time to trade the FX market?
Since Forex is a highly dynamic market, with lots of price oscillations in a single minute, it allows traders to enter the market many times a day and pull some profit from these numbers of trades. But this 24 hour market does not necessarily mean continuous volatility in the currencies. Most new traders often misinterpret the fact, that this market can be traded anytime during the working hours of the week.While there is always a definite movement, traders ideally need an environment of volatility, which may not be present at all the given times.

What are the most commonly traded currencies in the FX markets?
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 the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar.

Is there risk?
Yes. Just like other investment instruments, currency trading has risk of losing a portion or all of the money. There is no guarantee of profit. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

What is Margin?
Margin is essentially collateral for a position. If the market moves against a customer’s position, the broker will request additional funds through a “margin call.” If there are insufficient available funds, the open position will immediately be closed.

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 the difference between an “intraday” and “overnight position”?
Intraday positions are all positions opened anytime during the 24 hour period AFTER the close of the broker’s normal trading hours at 4:55 PM EST. Overnight positions are positions that are still on at the end of normal trading hours (4:55 PM EST), which are automatically rolled by the broker at competitive rates (based on the currencies interest rate differentials) to the next day’s price.

What is the difference between liquidity and volatility?
Volatility is a statistical measure of a market’s price movements over time. Volatility is high if prices change dramatically in a short period of time. Liquidity is a market condition that allows large transactions to be absorbed by the marketplace with little or no effect on price stability. With a daily trading volume that is 50x larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets, thereby assuring liquidity.

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 often are trades made?
Market conditions dictate trading activity on any given day.

How long are positions maintained?
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.