Chapter 1: Introduction
In this chapter we will try to answer all of the frequently asked questions by beginners.
-What is Foreign Exchange?
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$1.5 trillion. Foreign Exchange is the simultaneous 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 (EUR/USD) or Dollar/Yen (USD/JPY).
-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.
-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.
-What is the difference between an “intraday” and “overnight position”?
Intraday positions are all positions opened anytime during the 24 hour period of normal trading hours. Overnight positions are positions that are still on at the end of normal trading hours (5:00pm EST), which are automatically rolled at fixed rates (based on the currencies interest rate differentials) to the next day’s price.
-How do I manage risk?
The most common risk management tools in FX 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.
-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.
In order to gain a practical understanding of foreign exchange trading, there is no better way than to open a demo account, where you can experience what it’s like to trade the Forex market without risking any capital.
-How often are trades made?
Market conditions dictate trading activity on any given day. As a reference, the average small to medium trader might trade as often as 10 times a day. Of course there are times that the best trade is not trading. You don’t have to be in the market all the time. You may want to step aside and watch while bulls and bears are fighting.
-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;
3) another position that has a better potential appears and you need these funds.
-What is the minimum amount needed to open an account?
That totally depends on your broker.
-Does the foreign exchange market operate like the securities market?
No. Unlike the securities market, there is no central, geographic location such as the New York Stock Exchange (NYSE) where transactions are bid and cleared. As a result, foreign exchange trading requires the use of state-of-the-art technology to allow its investors to communicate instantly, 24 hours a day. Currency rates are influenced by supply and demand, making the foreign exchange market highly volatile. Average foreign exchange trading volume exceeds $1.5 trillion daily, compared to $25 billion in stock trades on the heaviest day in NYSE.
You finished reading the first chapter. If you read all of the text from beginning, that means you are really willing to learn currency trading.