1. What is Forex? What does Forex mean?
Forex is the abbreviation given for the term Foreign Exchange. It refers to the purchase and sale of currencies against other currencies and is performed with the aim of making gains or offsetting risk that may be brought on by the valuation/ devaluation of certain currencies.
The Forex Market is the world’s current largest financial market with a daily volume in excess of $4 million! Although Forex trading takes place globally the majority of trades are performed within the U.S, Japan, U.K and Europe.
2. How can I participate/trade Forex? Are there any tools needed?
Nowadays anyone with an internet connection can participate in Forex Trading through an OTC (over-the-counter) Forex Broker such as Oanda
. Registration is quick, easy and will allow you to commence trading within 10-15 minutes. Nowadays Forex Brokers provide clients with a downloadable/ web-based platform through which trading in the Forex market on an OTC basis, may be performed.
3. Who controls the Forex Market and is it located somewhere?
The Forex market is not controlled by anyone and it does not have a central location as it is not connected to any one specific country/ government organization.
Forex is conducted through an interbank Market as transaction in Forex requires two parties; a buyer and a seller.
4. When is the Forex Market in operation?
The Forex market opens at 2200 GMT each Sunday night and remains continuously open till 2200 GMT on Friday. The Forex market opens during the commencement of the Australian trading session and finishes at the closing of the U.S trading session.
5. How much does it cost to trade Forex?
When trading Forex there are 2 main ways in which a Broker imposes a cost for the facilitation of their services and these often depend on the type of Broker you have an account with.
A Market Maker (MM) or Straight through Process Broker (STP) will often increase the spreads they receive from their liquidity providers (usually larger than the broker that provides your broker with constant bid and ask prices for a range of currency pairs) and as such when opening a trade you will begin in a negative position.
An Electronic Communications Network (ECN) broker will provide you with raw price feeds from numerous buyers and sellers, which often provides for minimal spread and even sometimes no spread. Such brokers will charge a commission for each lot (100k units) or every 10 lots traded (depending on your account type/size).
Other fees that may be incurred include, deposit and/or withdrawal fees and overnight position fees.
6. What is meant by Margin?
Margin is the amount of money required to be put forward by a trader in order to open a position. The most common way to calculate the margin needed is price (of desired currency pair) * number of units (e.g. 100,000 for 1 standard lot) / by leverage
7. What is meant by long/short positions?
A long position refers to a position in which you are bought e.g. if you buy EUR/USD then you are said to belong on that currency pair rises. A long position becomes profitable as the price of the currency pair rises. A short position refers to a position in which you are sold e.g. if you sell the GBP/USD then you are said to be short on that currency pair. A short position becomes profitable as the price of the currency pair falls.
8. Is there an ultimate Forex trading strategy?
There is no ultimate trading strategy if there was I would not be developing a website. You should aim to develop your own strategies through your learning of fundamental analysis and/or technical analysis
. Note that most successful strategies tend to work for a limited period and as such when a strategy link to education that you have may cease to produce gains, it is advisable to alter/change your strategy.
9. What amount of money is needed in order to trade/ participate in Forex?
You may begin trading with as little as $1. This will depend on the Forex Broker with which you have opened an account with. For a list of Forex Brokers and the minimum amount with which you may open an account with, kindly click here
10. Is it possible to participate in Forex trading without having to download any software?
Yes! There are a number of brokers (a number which is continuously increasing) which provide web-based
trading platforms, thus enabling you not only to trade without downloading any software but also to trade from any internet accessible computer- a great option, especially for those who occasionally travel. For a list of such brokers kindly click here
11. How much do I stand to lose in Forex? Is there limited liabality? How high are the risks?
You can only lose what you have invested. The Forex Broker you have elected will not allow you to lose more than the amount with which you have funded your account, by means of stopping you out once your account balance comes to zero. Should a broker fail to stop you out in time (usually due to slippage brought on by high market volatility
) then any excess loss above your deposited amount is incurred by the Forex Broker. Needless to say, a Forex Broker wishes to avoid such loses and as such will often have a stop-out level that is a percentage of your margin used to hold the position open, usually around 20%.
12. Forex trading vs. Stocks/ Mutual funds trading.
One main difference between Forex and stocks/ mutual funds trading is that Forex trading is that Forex trading is usually performed in much smaller time frames (most trades are opened and closed within 24 hour period) whereas stocks/ mutual funds trading is performed in longer term (often months or years).
Such diversity in timeframe is brought on by the fact that Forex is a much more liquid and volatile market, allowing trades to enter and exit trades more frequently and efficiently in n comparison to stock/ mutual fund markets, or any other market for that instance.
13. Which Forex pairs constitute the Majors?
The following currency pairs constitute the majors:
>EUR/USD >GBP/USD >USD/JPY
>USD/CHF >USD/CAD >AUD/USD
14. Which periodicity (timeframe) should I use when trading Forex? When in the day should I trade?
There is no one time frame that works best when trading Forex. The one you choose should be based on whether you intend to trade long term or short term. In any case it is advisable to view multiple time frames in order to more clearly see trends as well as key support and/ or resistance levels.
15. Is there a change of manipulation/ cheating in the Forex market?
Of all the financial markets, Forex is considered as the ‘fairest’ market as no one individual/ organization can completely control the long term trend of the market.
This is a result of the fact that the Forex market is very large and is composed of countless market participants.
16. What is meant by intraday and overnight positions?
Intraday positions are positions which are opened and closed within the 24 period spanning from 22:00 GMT of one day to 22:00 GMT of the next.
Overnight positions are positions that have been opened prior tom and have remained opened after 22:00 GMT.
17. How is a currency pair price determined and how may it be influenced?
There are a number of factors which determine the valuation of a currency ranging from economic to political conditions, including mainly interest rates, inflation and political stability.
The price of currencies may be temporarily influenced by governments through a central bank intervention, in which the government may purchase or sell in large quantities, their home currency, Large market orders (outside of central banks) may also temporarily influence the market.
18. What is meant by cross pairs?
A cross pair is a pair in which the USD is not a part of (I.e. is neither the term or base currency) e.g. EUR/GBP.
19. What is the U.S Dollar Index and how is it comprised?
The U.S. Dollar Index (USDX) is a financial instrument that reflects sentiment on the USD. It is comprised of the following currencies:
>EUR: 57.6% >JPY: 13.6%
>GBP: 11.9% >Swedish Knona: 4.2%
>CAD: 9.1% >CHF: 3.6%
20. How to determine your stop-loss?
Stop losses should be at points at which your current position would make no sense I.e. if you are long, then a good indication of where you should place your stop-loss would be at a point that when reached would prompt you to take a short position and vice versa.
21. Can/ should a range be traded?
A range (also known as sideway pattern) may be traded through a number of strategies:
• Do nothing at all and wait for a breakout (yes this is in fact a trading strategy).
• Play a break off resistance
• Play a break off support
• Play a bounce off resistance
• Play a bounce of support
Remember also that you can always switch to a smaller timeframe, within which a trend may be obtained.
22. What information is given from a Candlestick?
Any given candlestick will show the price at the beginning and end of the period for which the candlestick was created, as well as the highest and lowest value during that period, denoted by the upper and lower ‘wick’ respectively, as demonstrated by image below.
23. How are the Fibonacci levels calculated?
The Fibonacci levels are calculated from the Fibonacci series (1, 1, 2, 3, 5, 8, 13…) by taking a number from the Fibo pattern (somewhere far along the line) and dividing by the immediate proceeding number and also from 2 numbers back to get key levels.
The reciprocals of these levels are also considered as key Fibo levels and are used to obtain Fibo extension levels that are drawn up when a currency pair breaks past a previous resistance/ support level.
24. What is decided during the Federal Reserve Open Market Committee Meeting?
Upon the meeting, the committee makes a decision on the short-term rates that banks must have, with long-term rates being decided by market auctions.
25. Is there any free education on Forex?
There are countless free books and websites offering education, as well as fxpips dedicating two sections of the website on fundamental analysis
and technical analysis
26. What is meant by a false breakout?
A false breakout is a definition given when the price of a currency pair may temporarily break past a key support/ resistance level, but retreat/ close off above/ below that level respectively. As such the break of the support/ resistance level is short lived.
27. Are there any strong indicators for trend reversals?
There are 2 indicators which are perceived as strong indicators of a likely trend reversal in the Forex Market; these being:
- A break through of the 61.8% Fibonacci level on a daily/ weekly chart.
- A break through of the 50-day simple moving average.
28. Is there a time at which indicators may have little/no significance to market movement?
Yes; prior to an important economic news announcement the indicators will have little influence/ indication as to which way the market may move.
29. What is Spread?
Spread is a term used which describes the difference between the bid and ask price of a certain currency pair and is measured in pips (1 pip most often is represented by the 4 decimal figure of currency pair).
30. What is Swap?
Swaps are the amount of money gained/incurred from having kept a position open from one trading day to another. The close off of one trading day occurs at 22:00 GMT (17:00 EST). These fees are brought on depending on the interest rates of the currency pair that you have open.