Forex FAQ.

What is Foreign Exchange, Forex or FX Trading?

Foreign exchange is the simultaneous purchase of one currency and sale of another – currencies are always traded in pairs. International currencies are traded on floating exchange rates. There is a daily average turnover of about US$1.5 trillion in the foreign exchange markets. The foreign exchange market is known as the "Forex," or "FX" market. It is the largest financial market in the world.

Is there a central location for the Forex Market?

Forex trading is not managed through an exchange. Since transactions are conducted between two counterparts, the Forex market is an “inter-bank,” or over the counter (OTC) market.

What are the most common currencies in the Forex markets?

The most “liquid” currencies in the Forex market are those of countries with low inflation, stable governments, and respected central banks. Nearly 85% of daily transactions involve the major currencies, including the U.S. Dollar, Japanese Yen, the European Union Euro, British Pound, Swiss Franc, and the Canadian and Australian Dollars.

What is the difference between an "intraday" and "overnight position"?

Intraday positions are all positions which are opened and closed anytime during normal trading. Overnight positions are positions that are still on at the end of normal trading hours, which are usually rolled over by your Forex broker, normally based on the currencies interest rate differentials, to the next day's price.

What are “short” and “long” positions?

Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from changing market prices. Since currencies are traded in pairs, every Forex position inevitably requires the investor to go short in one currency and long in the other.

How is pricing determined for certain currencies?

The full range of economic and political conditions impact currency pricing. It is generally held that interest rates, inflation rates and political stability are top among important factors. At times, governments participate in the Forex market in order to influence the traded value of their currencies. These and other market factors such as very large orders can cause extreme relative volatility in currency prices. The sheer size of the Forex market prevents any single factor from dominating the market for any length of time.

What is Margin?

Margin is essentially collateral for a position. It allows traders to take on leveraged positions with a fraction of the equity necessary to fund the trade. In the equity markets, the usual margin allowed is 50% which means an investor has double the buying power. In the Forex market leverage ranges from 1% to 2%, giving investors the high leverage needed to trade actively.