Forex FAQs
Apr 20, 2009 Make Money Online
Q1: What is a Forex Broker?
A Forex broker is very similar to a stock broker, and many new online Forex brokerages have recently emerged. The key difference is that Forex brokers deal only in currency exchange investments.
Similar to securities brokerages, Forex brokers come in all sizes, shapes, and levels of service. An online Forex broker provides minimal service at minimal cost. If you require more advice and expert guidance, there are many full service Forex brokers available, as well.
If you do go with an online broker, make sure that you choose one that has an extensive online knowledge base and 24/7 support so that you can execute all trades wisely, and quickly.
Q2: How do I open a Forex Trading account?
A forex trading account can be opened with any established forex broker. Before you open a forex trading account, please be sure to check the broker’s endorsements as a Futures Commission Merchant (FCM) registered with the National Futures Association. You can open a forex trading account online, over the telephone, or via fax.
To open a forex trading account, you will need your standard information as well as social security number and bank account information. This is why it is important to verify that the broker is a member of the National Futures Association.
Once your account is open, you can choose to participate in a demo account or begin live forex trading.
Q3: What is traded in the Forex market?
The instrument traded by Forex traders and investors are currency pairs. A currency pair is the exchange rate of one currency over another. The most traded currency pairs are:
USD/CHF: Swiss franc
GBP/USD: Pound
USD/CAD: Canadian dollar
USD/JPY: Yen
EUR/USD: Euro
AUD/USD: Aussie
These six currency pairs generate up to 85% of the overall volume in the Forex market. So, for instance, if a trader goes long on the Euro, she or he is simultaneously buying the EUR and selling the USD. If the same trader goes short or sells the Aussie, she or he is simultaneously selling the AUD and buying the USD.
The first currency of each currency pair is referred as the base currency, while second currency is referred as the counter or quote currency. Each currency pair is expressed in units of the counter currency needed to get one unit of the base currency. If the price or quote of the EUR/USD is 1.2545, it means that 1.2545 US dollars are needed to get one EUR.
Q4: Forex Terminology?
Bid/Ask Spread
All currency pairs are commonly quoted with a bid and ask price. The bid (always lower than the ask) is the price your broker is willing to buy at, thus the trader should sell at this price. The ask is the price your broker is willing to sell at, thus the trader should buy at this price.
EUR/USD 1.2645/48 or 1.2645/8
The bid price is 1.2645
The ask price is 1.2648
Pip
A pip is the minimum incremental move a currency pair can make. A pip stands for price interest point. A move in the EUR/USD from 1.2545 to 1.2560 equals 15 pips. And a move in the USD/JPY from 112.35 to 113.40 equals 105 pips.
Margin Trading (leverage)
In contrast with other financial markets where you require the full deposit of the amount traded, in the Forex market you require only a margin deposit. The rest will be granted by your broker.
The leverage provided by some brokers goes up to 400:1. This means that you require only 1/400 or .25% in balance to open a position (plus the floating gains/losses.) Most brokers offer 100:1, where every trader requires 1% in balance to open a position.
The standard lot size in the Forex market is $100,000 USD.
For instance, a trader wants to get long one lot in EUR/USD and he or she is using 100:1 leverage.
To open such position, he or she requires 1% in balance or $1,000 USD.
Of course it is not advisable to open a position with such limited funds in our trading balance. If the trade goes against our trader, the position is to be closed by the broker. This takes us to our next important term.
Margin Call
A margin call occurs when the balance of the trading account falls below the maintenance margin (capital required to open one position, 1% when the leverage used is 100:1, 2% when leverage used is 50:1, and so on.) At this moment, the broker sells off (or buys back in the case of short positions) all your trades, leaving the trader “theoretically” with the maintenance margin.
Most of the time margin calls occur when money management is not properly applied.
Foreign Currency Trading Rates
The simplest definition of foreign currency exchange rates is the rate at which one currency, such as U.S. dollars, can be traded for another. As these currency exchange rates fluctuate constantly, there is considerable opportunity to earn money from the differences – called “arbitrage.”
There are online sites that show currency exchange rates in real time where traders, or travelers, can check exchange rates.The market through which investors trade in foreign currencies is called the Forex market.
You can refer to Foreign Exchange Rates at the Federal Reserve website: http://www.federalreserve.gov/releases/h10/update/
Q5: What is the mechanism of a Forex trade?
The trader, after an extensive analysis, decides there is a higher probability of the British pound to go up. He or she decides to go long risking 30 pips and having a target (reward) of 60 pips. If the market goes against our trader he/she will lose 30 pips, on the other hand, if the market goes in the intended way, he or she will gain 60 pips. The actual quote for the pound is 1.8524/27, 4 pips spread. Our trader gets long at 1.8530 (ask). By the time the market gets to either our target (called take profit order) or our risk point (called stop loss level) we will have to sell it at the bid price (the price our broker is willing to buy our position back.) In order to make 40 pips, our take profit level should be placed at 1.8590 (bid price.) If our target gets hit, the market ran 64 pips (60 pips plus the 4 pip spread.) If our stop loss level is hit, the market ran 30 pips against us.
Q6: Why Forex?
- 24-hour trading, 5 days a week with non-stop access to global Forex dealers
- An enormous liquid market making it easy to trade most currencies
- Volatile markets offering profit opportunities
- Standard instruments for controlling risk exposure
- The ability to profit in rising or falling markets
- Leveraged trading with low margin requirements
- Many options for zero commission trading
- A trader can open a position for any period of time he wants
- No fees, except for the difference between buying and selling prices
- An opportunity to get a bigger profit that the invested sum
- Qualified work in the FOREX market can become your main professional activity
- You can make deals any time you like
It’s very important to understand every aspect of forex trading. Start first from the very basic concepts, then move on to more complex issues such as Forex trading systems, trading psychology, trade and risk management, and so on. And make sure you master every single aspect before adventuring in a live trading account.
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