Forex Money Train

FAQ

What is Foreign Exchange?

The foreign exchange market, also referred to as the “foreign currency,” “forex” or “fx” market, is the largest financial market in the world with daily average transactions of approximately U.S. $2 trillion. The world’s currencies are on a floating exchange rate and are always traded in pairs; for example, Euro/U.S. Dollar or U.S. Dollar/Yen. Foreign Exchange is simply the simultaneous purchase of one currency and selling of another. Where is the central location of the forex market? Forex trading is not centralized on an exchange, as with the stock and futures markets. The forex market is considered an over-the-counter (OTC) or “interbank” market, due to the fact that transactions are conducted directly between two counterparties over an online trading platform, electronic network or via the telephone.

Who are the participants in the forex market?

The forex market is referred to as an “interbank” market due to the fact that it has historically been dominated by various government 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, futures traders, options traders and private speculators.

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. Most forex transactions involve trading of the “major” currencies which include the US Dollar, Japanese Yen, Eurocurrency, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar.

How are currency prices determined?

Currency prices are affected by a variety of economic and political conditions, the most important of which are 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 virtually impossible for any one entity to “drive” the market for any length of time.

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. The forex market is typically open 24 hours a day from Sunday 5:00pm ET until Friday 4:00pm ET, except on scheduled holidays. However, exact times may vary by clearinghouse or dealer. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the exact time they occur – day or night.

What is the difference between an “intraday” and “overnight” position?

Intraday positions are all positions opened anytime during the 24 hour trading period. Overnight positions are positions that are still on at the end of normal trading hours (typically around 4:00 pm CST), which are automatically rolled-over at competitive rates (based on the currencies interest rate differentials) to the next day’s price.

How is risk managed?

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 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 during normal market conditions. Forex options are also commonly used to help manage and/or hedge risk exposure.

Placing Contingent Orders may not limit your losses to the intended amounts.

What margin rates are required to open and maintain a position?

Some brokers allow customers to execute margin trades at up to 400:1 leverage in the spot market (depending on what type of account is opened). This means that investors can execute trades worth $100,000 with an “initial margin” requirement of $500 or less. Our recommendation is to never leverage your positions more than 100:1, but rather suggest 50:1. If an account balance breaches the “maintenance margin” requirement the open position may automatically be closed (offset) at the current rate. At the discretion of the clearinghouses, maintenance margin rates may be increased from time to time, especially before a weekend or holiday, to account for unexpected price volatility that can occur while the markets are closed. Remember, increasing leverage increases risk.

How much money do I have to keep in my account once it is open?

Once your account is open, there is no minimum balance requirement beyond the margin rates for any positions held in your account.

Are there any monthly or annual account fees?

Most brokers do not require account fees for annual fees for forex trading accounts. However some will charge commissions for some transactions. Check with a potential broker before opening an account.

How quickly can I open an account and how soon can I begin trading?

New accounts can be opened and ready to trade in as little as 48-72 hours (with funds wired into the account).

How fast can I expect my fills to be returned to me?

For online accounts, market order fills are returned to you instantaneously. Market conditions may cause delays in order filling when market volatility is high.

Where are my funds held?

Most brokers will use respective clearinghouses at U.S. banking institutions to hold client funds.

How do I deposit or withdraw money from my account?

Withdrawals or deposits can be made by check or wire transfer.

Can I transfer an account from another firm to another?

Yes, depending on the broker. Some broker/dealers will have an account transfer form that you can complete, while at the same time, completing a new account form.

Is foreign exchange trading expensive?

No. Mini accounts can be opened with as little as $250. With leverage set at 200:1 traders can execute trades with as little as $50 of required margin. Remember, increasing leverage increases risk.

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 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 much does the currency market move?

A typical day is 60-90 PIPS movement per currency. A Forex trading day will produce a 120-300 PIP movement.

What does it mean to have a “Short” or “Long” position?

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.

What is Margin?

Margin is essentially collateral for a position. If the market moves against a customer’s position, additional funds will be requested through a “margin call.” If there are insufficient available funds, immediately the customer’s open positions will be closed out. It is important to note that when a trader makes a trade the Market Maker (Forex broker) $500 of margin for each lot traded ($50 on a mini account). This is NOT your risk. Your actual risk on the trade is the amount the Forex Broker charges to enter the trade (typically 5-10 pips depending on currency cross) and the amount of your stop loss.

What is a PIP (price index point)?

The smallest increment that a particular currency pair can move. The EURUSD currency cross has a PIP value of $10. A move of 10 PIPS = $100