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 or Dollar/Yen.
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.
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.
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.
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.
No. FXA requires a minimum deposit of $250. FXA allows customers to
execute margin trades at up to 200:1 leverage. This means that investors
can execute trades of $10,000 with an initial margin requirement of
$50. 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 pragmatic margin trade
for someone new to the FX markets would be 20:1 but ultimately depends
on the investor's appetite for risk.
Margin is essentially collateral for a position. If the market moves
against a customer's position, FXA will request additional funds through
a "margin call." If there are insufficient available funds, FXA will
immediately close out the customer's open positions.
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.
Intraday positions are all positions opened anytime during the 24
hour period AFTER the close of FXA's 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
by FXA at competitive rates (based on the currencies interest rate
differentials) to the next day's price.
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.
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.
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.
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. Most importantly, by not charging commission, FXA
customers can take positions as often as necessary without worrying
about excessive transaction costs.
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.
In The Forex Market section we describe the foreign exchange market
in some detail. 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.
