What is Foreign Exchange?
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. With a daily average turnover of approximately US$2 trillion, the Foreign Exchange market, also known as the "Forex" or "FX" market, is the largest financial market in the world.
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Where is the central location of the FX Market?
Unlike the stock and futures markets, FX Trading is not centralized on an exchange. Due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network, the FX market is considered an Over the Counter (OTC) or 'Interbank' market.
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Who are the participants in the FX Market?
The reason that the Forex market is referred to as an 'Interbank' market is 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.
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When is the FX market open for trading?
Forex is a true 24-hour market and trading begins each day in Sydney, and then 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.
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What are the most commonly traded currencies in the FX markets?
The most frequently traded or 'liquid' currencies are those of countries with stable governments, respected central banks, and low inflation. Nowadays, 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.
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Is Forex trading capital intensive?
No. Friedberg Direct requires a minimum deposit of just $600 for opening a Mini account and $6,000 for a regular account. Friedberg Direct enables currency trading to be conducted on a highly leveraged basis. You are able to select the degree of leverage or gearing that you wish to employ in trading. Unless you specify otherwise, Friedberg Direct sets your leverage level at Friedberg Direct's most lenient requirement. 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.
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What is Margin?
Margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows you to hold a position much larger than your actual account value. Friedberg Direct' s online trading platform performs an automatic pre-trade check for margin availability, and will only execute the trade if you have sufficient margin funds in your account. The system also calculates the funds needed for current positions and displays this information to you in real time. In the event that funds in your account fall below margin requirements, the Friedberg Direct Trading Station will close all open positions. This prevents your account from ever falling below the available equity even in a highly volatile, fast moving market.
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What does it mean have a "long" or "short" position?
A long position is simply 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.
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What about terms like "bid/ask", "spread", and "rollover"?
Friedberg Direct has an extensive Glossary, that provides detailed definitions of all Forex related terms.
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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 Friedberg Direct's normal trading hours at 5:00pm EST. Overnight positions are positions that are still open at the end of normal trading hours (5:00pm EST), which are automatically rolled by Friedberg Direct.
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How are currency prices determined?
Currency prices are affected by a variety of economic and political conditions, but probably the most important are interest rates, inflation and political stability. Sometimes governments actually 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.
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How do I manage risk?
The limit order and the stop loss order are the most common risk management tools in FX trading. 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. Friedberg Direct guarantees execution of stop loss and other limit orders, at the specified price, on all orders up to $1 million – except during extremely volatile market conditions.
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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.
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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 and offering tight spreads, Friedberg Direct customers can take positions as often as necessary without worrying about excessive transaction costs.
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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) you decide to close the position to free up margin for another trade.
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I am interested in foreign exchange trading, but would like some additional information. Any suggestions?
In the Intro to Forex 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. In addition, our Courses offer invaluable education on the basics of trading and more advanced sections on technical analysis strategies.
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How does the Margin Call work?
If the equity balance in your account falls below the margin requirement, a margin call will be generated. In the event that an account exceeds its maximum allowable leverage, ALL open positions will be liquidated immediately, regardless of the size or the nature of positions held within the account. Further details about margin requirements can be found in the Spreads, Margins & Details link on the menu under the Currency Trading section. In this situation, clients are not notified prior to the liquidation of their positions.
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