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$4 trillion. Foreign exchange trading 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/US Dollar (EUR/USD) or US Dollar/Yen (USD/JPY).
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 between two counterparts over the telephone or via an electronic network.
The FX 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 non-bank participants is rapidly growing, and now includes large multinational corporations, portfolio managers, registered dealers, international money brokers, futures and options traders, and private speculators.
A true 24-hour market, trading in FX begins each day in Sydney (Australia), and moves around the globe as the business day begins in each financial center, first to Tokyo (Japan), then London (England – UK), and New York (USA). 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 (without any market manipulation or trading halts).
The most often traded or "liquid" currencies are called the "majors" These "stronger" or "more popular" currencies are those of countries with stable governments, respected central banks, and typically 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. All the major currency pairs include the US Dollar (USD) as one of its components, even though non-USD pairs (called "crosses") like the EURGBP, GBPJPY, etc. are commonly traded as well.
No. The minimum deposit required is $250 USD. Customers are allowed to execute margin trades at up to 500:1 leverage. This means that investors can execute trades up to $500,000 with an initial margin requirement of $1000. However, it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great. A more realistic sized trade for someone new to the Forex Markets would be 5:1 or even 10:1, but it ultimately depends on the investor's appetite for risk or risk tolerance.
Margin is essentially collateral for a position. If the market moves enough 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. The reciprocal of margin is called "leverage;" that is, 1/margin.
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. Normally, "long" and "short" are used to refer to a position taken in terms of the "base" currency (the currency listed first in a currency pair).
We have an extensive glossary that provides detailed definitions of all forex related terms. Click on this link to go to the forex glossary. We also have an education section that can help you with the basics.
Intraday positions are all positions opened anytime during the 24 hour period AFTER the close of normal trading hours at 4:30pm EST. Overnight positions are positions that are still on at the end of normal trading hours (4:30pm EST), which are automatically rolled at competitive swap rates (based on the currencies interest rate differentials) to the next day's price.
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 currency markets 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 FX makes it impossible for any one entity to "drive" or manipulate the market for any length of time.
The most common risk management tools in trading are the limit order and the stop loss order. A limit order places a 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 a trader's position. The liquidity of the foreign exchange market ensures that limit orders and stop loss orders can be easily executed during most market conditions.
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 rumors. 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, the release of an economic figure above or below the market expectations, or even an act of war. Nonetheless, more often it is the expectation of an event that drives the mMarket rather than the event itself.
Market conditions dictate trading activity on any given day. As a reference, the average small to medium trader might trade as often as 5-10 times a day. There are some less active traders ("swing traders") who might trade less than that and active traders or "scalpers" who might trade a lot more if the conditions are right.
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 to free up the funds.
In the Education section we describe the foreign exchange market in some detail. In order to gain a practical understanding of FX trading, there is no better way than to open a demo account, where you can experience what it's like to trade the market without risking any capital using live prices.