Foreign Exchange FAQ

Foreign Exchange FAQ, No. 1: What is Foreign Exchange / Forex / FX?

This is probably the most frequently asked question of the foreign exchange FAQs. Foreign exchange is the simultaneous purchase of one currency and sale of another – currencies are always traded in pairs. International currencies are traded on floating exchange rates. There is a daily average turnover of about US$1.9 trillion in the foreign exchange markets. The foreign exchange market is known as the "Forex," or "FX" market. It is the largest financial market in the world.

Foreign Exchange FAQ, No. 2: Is there a central location for the Foreign Exchange Market?

Foreign exchange trading is not managed through an ‘exchange’. Since transactions are conducted between two counterparts, the FX market is an “inter-bank,” or over the counter (OTC) market.

Foreign Exchange FAQ, No. 3: Who participates in the Foreign Exchange market?

Central, commercial and investment banks have traditionally dominated the Forex market. Other market participation is rapidly increasing, and now includes international money managers and brokers, multinational corporations, registered dealers, options and futures traders, and private investors.

Foreign Exchange FAQ, No. 4: When is the Foreign Exchange market open for trading?

Foreign exchange is a true global 24-hour marketplace. The trading day begins in Sydney, and moves around the globe as each financial centre comes to life. Tokyo follows, then London, and finally New York. Investors can respond in real time to any fluctuations caused by current economic, social and political events.

Foreign Exchange FAQ, No. 5: What are the most common currencies in the Foreign Exchange markets?

The most “liquid” currencies in the Forex market are those of countries with low inflation, stable governments, and respected central banks. Nearly 85% of daily transactions involve the major currencies, including the U.S. Dollar, Japanese Yen, the European Union Euro, British Pound, Swiss Franc, and the Canadian and Australian Dollars.

Foreign Exchange FAQ, No. 6: Is it capital intensive to trade foreign exchange?

Foreign exchange capital management typically requires a minimum deposit of $300 to open a Mini Account and $2000 for a regular account. Your relationship with foreign exchange capital management enables you to conduct highly leveraged trades (as much as a 400 to 1 leverage ration in the Mini Account.) You set the degree of leverage that you wish to deploy. Unless otherwise specified, your leverage level is set at the most lenient level required by your account size. Please remember that while this degree of leverage enables you to maximize your profit potential, there is an equally great potential for loss.

Foreign Exchange FAQ, No. 7: What is Margin?

Margin is a performance bond that insures against trading losses. Margin requirements in the foreign exchange marketplace allow you to hold positions much larger than the asset value of your account. Trading with foreign exchange capital management includes a pre-trade check for margin availability. The trade is executed only if there are sufficient margin funds in your account. The foreign exchange capital management trading system calculates cash on hand necessary to cover current positions, and provides this information to you in real time. If funds in your account fall below margin requirements, the system will close all open positions. This prevents your account from falling below your available equity, which is a key protection in this volatile, fast moving marketplace.

Foreign Exchange FAQ, No. 8: What are “short” and “long” positions?

Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from the changing market prices. Remember, since currencies are traded in pairs, every foreign exchange position inevitably requires the investor to go short in one currency and long in the other.

Foreign Exchange FAQ, No. 9: What is the difference between an "intraday" and "overnight position"?

Intraday positions are all positions opened anytime during the 24 hour period AFTER the close of Foreign Exchange Capital’s normal trading hours at 5:00pm EST. Overnight positions are positions that are still on at the end of normal trading hours (5:00pm EST), which are automatically rolled by the Foreign Exchange Capital Management.

Foreign Exchange FAQ, No. 10: How is pricing determined for certain currencies?

The full range of economic and political conditions impact currency pricing. It is generally held that interest rates, inflation rates and political stability are top among important factors. At times, governments participate in the foreign exchange market in order to influence the traded value of their currencies. These and other market factors such as very large orders can cause extreme relative volatility in currency prices. The sheer size of the foreign exchange market prevents any single factor from dominating the market for any length of time.

Foreign Exchange FAQ, No. 11: How can I manage risk?

The most common risk management tools in foreign exchange trading are the stop-loss order and the limit order. The stop-loss order directs that a position be automatically liquidated at a certain price in order to guard against dramatic changes against the position. A limit order sets the maximum price that the investor is willing to pay in a transaction, as well as a minimum price to be received in exchange. The foreign exchange marketplace is so liquid that it is easy to execute stop-loss and limit orders. Foreign exchange capital management guarantees execution of stop-loss and limit orders at the specified price on orders up to US$1 million.

Foreign Exchange FAQ, No. 12: What trading strategy should I use?

Both economic fundamentals and technical factors influence the decisions of currency traders. Those who follow economic fundamentals use government issued reports, current news, and broad economic trends to anticipate movements in price. Technical traders rely on trend lines, support and resistance levels, and a variety of charts and mathematical analysis to identify trading opportunities. Over time, the most significant price movements occur in close association with unexpected events. Perhaps the central bank changes rates without warning or an election puts an unexpected candidate in power. News from conflicts certainly impacts currency pricing. More often than not, it is the expectation of a certain event rather than the actual event that drives price pressures.

Foreign Exchange FAQ, No. 13: How often can trades be made?

As one might expect, trading activity on any particular day is dictated by current market conditions. Some small to medium size traders might make as many as 10 transactions in a day. By not charging commission and offering tight spreads, foreign exchange capital management investors can take positions as often as is necessary without concern for excessive transaction costs.

Foreign Exchange FAQ, No. 14: How long should a position be maintained?

Foreign exchange traders generally hold positions until one of three criteria is met:

A sufficient profit has been realised from the position.
A pre-set stop-loss order is triggered.
A better potential position emerges and the trader needs to liquidate funds to take advantage of it.

Foreign Exchange FAQ, No. 15: How do margin calls work?

A margin call is generated when the equity balance in an account drops below the margin requirement for that account size. If the maximum allowable leverage has been exceeded, any open positions are immediately liquidated, regardless of the nature or size of the positions.

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