What is Foreign Exchange?
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.
|
|
top
|
Where is the central location of the FX Market?
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.
|
|
top
|
Who are the participants in the FX Market?
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.
|
|
top
|
When is the FX market open for trading?
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.
|
|
top
|
What are the most commonly traded currencies in the FX markets?
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.
|
|
top
|
Is Forex trading capital intensive?
No.
AlaronFX requires a minimum deposit of $5,000. AlaronFX allows
customers to execute margin trades at up to 100:1 leverage. This means
that investors to execute trades up to $100,000 with an initial margin
requirement of $2000. 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 5:1 or even
10:1, but ultimately depends on the investor's appetite for risk.
|
|
top
|
What is Margin?
Margin
is essentially collateral for a position. If the market moves against a
customer's position, AlaronFX will request additional funds through a
"margin call." If there are insufficient available funds, AlaronFX will
immediately close out the customer's open positions.
|
|
top
|
What does it mean have a ' long' or 'short'
position?
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.
|
|
top
|
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 AlaronFX'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
AlaronFX at competitive rates (based on the currencies interest rate
differentials) to the next day's price
|
|
top
|
What is the difference between liquidity and volatility?
Volatility is a statistical measure of a market's
price movements over time. Volatility is high if prices change
dramatically in a short period of time.
Liquidity
is a market condition that allows large transactions to be absorbed by
the marketplace with little or no effect on price stability. With a
daily trading volume that is 50x larger than the New York Stock
Exchange, there are always broker/dealers willing to buy or sell
currencies in the FX markets, thereby assuring liquidity.
|
|
top
|
How are currency prices determined?
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.
|
|
top
|
How do I manage risk?
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.
|
|
top
|
What kind of trading strategy should I use?
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.
|
|
top
|
How often are trades made?
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, AlaronFX customers
can take positions as often as necessary without worrying about
excessive transaction costs.
|
|
top
|
How long are positions maintained?
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.
|
|
top
|
I am interested in foreign exchange trading,
but would like some additional information. Any suggestions?
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.
|
|
top
|
| * Stop loss orders become market orders once
elected and may be executed at a price worse than the stop price. |
