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What is Forex?
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Forex, or Foreign Exchange, is
the simultaneous exchange of one countrys currency for that of another.
An investor wishes to purchase or sell one currency for another with the hope of
making a profit when the value of the currencies changes in favor of the
investor, whether from market news or events that take place in the world. This
market of exchange has more daily volume, both buyers and sellers, than any
other in the world. Taking place in the major financial institutions across the
globe, the forex market is open 24-hours a day.
Buying/Selling
In this market you may buy or sell currencies. The objective is to earn a profit
from your position. If you have bought a currency, for example, and the price
appreciates in value, then you will earn a profit by closing your position. When
you close your position, sell the currency back in order to lock in the profit,
you are in actuality buying the counter currency in the pair. By trading
currency pairs, one currency valued against another, a rate of worth has been
established. After all, a countrys currency has value only relative to the
currency of another country.
Quoting Conventions
Currencies are quoted in pairs. The first listed currency is known as the base
currency, while the second is called the counter or quote currency. In the
wholesale market, currencies are quoted using five significant numbers, with the
last placeholder called a point or a pip.
Like all financial products, FX
quotes include a "bid" and "ask". By quoting both the bid and ask in real time,
a regulated broker ensures that traders always receive a fair price on all
transactions. As in any traded instrument, there is an immediate cost in
establishing a position. For example, USD/JPY may bid at 131.40 and ask at
131.45, this five-pip spread defines the traders cost, which can be recovered
with a favorable currency move in the market.
Margin
The margin deposit is not a down payment on a purchase of equity, as many
perceive margins to be in the stock markets. Rather, the margin is a performance
bond, or good faith deposit, to ensure against trading losses. The margin
requirement allows traders to hold a position much larger than the account
value. Most brokers online trading platform has margin management capabilities,
which allow for this high leverage.
In the event that funds in the account fall below margin requirements, the
Dealing Desk will close all open positions. This prevents clients' accounts from
falling into a negative balance, even in a highly volatile, fast moving market.
Rollover
For positions open at 5pm EST, there is a daily rollover interest rate that a
trader either pays or earns, depending on your established margin and position
in the market. If you do not want to earn or pay interest on your positions,
simply make sure it is closed at 5pm EST, the established end of the market day.
What Every Currency Trader Should Know
The forex market is one of the most popular markets for speculation due to its
enormous size, liquidity, and tendency for currencies to move in strong trends.
An enticing aspect of trading currencies is the high degree of leverage
available. Forex Brokers allow positions to be leveraged up to 100:1. Without
proper risk management, this high degree of leverage can lead to enormous swings
between profit and loss. Knowing that even seasoned traders suffer losses,
speculation in the forex market should only be conducted with risk capital funds
that if lost will not significantly affect one's personal financial well being.
The Mini account was designed for those new to online currency trading. There is
a smaller deposit required to open a Mini account and trading sizes are 1/10th
the size of a regular account. The smaller trade size enables traders to take
smaller risks. The Mini is intended to introduce traders to the excitement of
currency trading while minimizing risk.
Click here to try a demo trading account
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