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Forex Tutorial: FX FAQ
What is the forex, fx, or foreign exchange?
Forex and fx stand for foreign exchange. Foreign exchange means exchange of one currency for another currency, or to put it simply, simultaneously buying one currency and selling another. Normally, currencies are traded in pairs such as euro/US dollar (EUR/USD or eur/usd) on floating exchange rates in forex markets. With daily average turnover over US$1.5 trillion, forex is the largest and most liquid financial market on the globe. It is estimated to take New York Exchange around 2-3 months to reach 1 day's trading volume in forex. Forex can be traded as forwards and futures, options, spread betting, contracts for difference, and the spot market. In this web site, forex trading generally refers to trading in the spot forex market.
Where is forex traded?
Unlike the stock market, forex trading is not traded through a central exchange. Rather, forex trading is conducted over a globally interconnected network via telecommunication. Individual forex traders access to this network via their forex brokers and trade directly with other traders or market makers.
When can forex be traded?
Forex is traded 24 hours a day from about 1am GMT, Monday to Friday. Because of the time-zone difference, forex traders residing in North America can start trading in Sunday afternoon, while those in East Asia are able to trade on early Saturdays. However, different brokers may open and close their trading systems at different time at the weekend. Forex traders should be aware of the starting and closing time of their specific forex brokers.
A trading day (or session) starts at the open of the Asian and Pacific Markets at 12h30 (CET – Central European time) and ends at the close of New York market (NYC) at 11:00 CET the following day.
Which currency can be traded?
Most currencies in the world can be traded in the forex market. For individual forex trader, the currencies can be traded depend on the forex broker(s) he or she chooses. The most traded currencies, such as USD, EUR, JPY, GBP, CHF, CAD, AUD, NZD are offered by most forex brokers. Novice traders normally start trading with currency pairs between these currencies, which are the most liquid and usually have tighter spreads.
Who are the participants in forex trading?
The traditional dominant actors in forex trading are large banks (central banks, commercial banks, and investment banks), which trade in an exclusive club – the interbank market. Thanks to the Internet, other forex traders, including multinational corporations, investment funds, and individual investors, are playing an increasingly larger role in the forex market.
How much capital is needed to begin forex trading?
It is possible to start forex trading with $1. It depends on the specific forex broker. (See the Broker List andCompare Forex Brokers)
How can one open a forex account?
Check the Broker List, How to Choose a Best Forex Broker, and follow the procedure on the broker's web site to open an account. Normally, it is required to provide some personal information and make a deposit.
What is margin?
The amount of money or collateral deposited by a forex trader with his broker. There are initial margin, maintenance margin.
A margin call is a request from a forex broker to a forex trader to restore the margin deposits to initial levels. If the forex trader fails to do so, account holdings may be liquidated.
What is pip ?
Pip is the smallest price unit of a currency in forex (fx) trading, for example, 0.0001 US dollar or 0.01 Japanese Yen. Also called points.
What is spot forex market?
Spot market in forex trading refers to the market where currency pairs are bought or sold at the current market price.
What is spread?
The difference between the bid price and the ask price of a currency pair in forex trading. Forex brokers may differ in their bid/ask spreads, and they may change bid/ask spread during different time periods of the day. A wider bid/ask spread typically occurs when a currency pair is illiquid. Lower or lowest bid / ask spread is preferable for forex traders, other things being equal.
How to place a limit order?
A limit order is an order to buy or sell a currency pair at a specific price, which is normally better than the current market price. The broker can only fill a buy limit order at the limit price or lower, and a sell limit order at the limit price or higher. For example, if the current price of GBP/USD is 1.5100/05, you can place a buy limit order at 1.5033, or a limit sell order at 1.5177.
How is money made in forex trading?
Money can be made either with a buy order or a sell order. With a buy order, money is made when the order is closed above the entry price; with a sell order, money is made when the order is exited below the entry price. For example, suppose the current price of GBP/USD is 1.5100/05; a buy order entered at the market price 1.5105 and closed at 1.5155 would earn 50 pips; on the other hand, a sell order at the market price 1.5100 and exited at 1.5050 would gain 50 pips as well.
The currency pairs between U.S. dollar and the euro, Japanese yen, British pound, and Swiss frank are most traded currency pairs. Namely, they are: EUR/USD, USD/JPY, GBP/USD, USD/CHF.
In addition, the currency pairs between U.S. dollar and the commodity currencies – the Australian dollar, the Canadian dollar, and the New Zealand dollar – are also heavily traded (AUD/USD, NZD/USD, USD/CAD).
What factors determines prices in forex markets?
Factors influencing forex prices can be largely classified into three categories: fundamental, technical, and psychological or sentimental. Read How to Perform Fundamental Analysis in Forex Trading, How to Perform Technical Analysis in Forex Trading, and Measuring Sentiment in Forex Trading for more details.
What's the best time to trade forex?
The best time to trade forex is when the market is most liquid. Generally speaking, liquidity of the forex market is higher during the overlapping hours that both American and European banks are open, and the overlapping hours that both Asian and European banks are open; or put it another way, during the overlap of the European and the US trading sessions, and overlap of the European and the Asian trading sessions.
How to choose a forex broker?
A good forex broker should be honest, provide lower spread, fast execution, reliable system, and decent customer services. Read How to Choose a Best Forex Broker for more detail.
How can analysis of forex market be made?
Analysis of the forex market is mostly performed by examining the fundamental, technical, and psychological or sentimental factors. Read How to Perform Fundamental Analysis in Forex Trading, How to Perform Technical Analysis in Forex Trading, and Measuring Sentiment in Forex Trading for more details.
How is pivot point calculated?
Pivot points are high-probability price levels derived and assumed from technical analysis. Pivot points are widely used by professional forex traders. There are different ways to calculate pivot points: Floor (Classical) Pivot Points, Tom DeMark’s Pivot Points, Woodie's Pivot Points, Camarilla Pivot Points, and Fibonacci Pivot Points. Read Technical Analysis: Forex (FX) Pivot Points, and use the tool provided here to calculate pivot points, or download the free pivot points calculators to your desktop.
How to start with forex trading?
To start with forex trading, it is best to learning the forex basics first.
Then try demo trading. Proceed to real trading only after constant winning in demo trading has been proved. Read Getting Started with Forex Trading Step by Step for more information.
How long can a forex position be kept?
Unlike future or option positions which have maturities, a forex position in the spot market can be kept as long as one likes theoretically. In actual trading, the duration of a forex position depends on the forex trader's trading strategies and perception of the market.
How to get economic data for forex trading?
In general, economic data for forex trading can be obtained from the web sites of the official publishers of those data. Click here (Economic Data Sources) to see a list of official publishers of economic data in many countries.
How to get historical data of forex trading?
Free historical data of forex trading is available for downloading from several web sites. Click here for downloading free historical data of forex trading.
How to manage forex trading risk?
Forex trading risk can be controlled with risk management - identifying exposure to various market or non-market factors that might impose negative impact on forex trading results, and applying trading rules to minimize trading losses. Read Approaches of Risk Management in Forex Trading for methods of handling risks in forex trading.
What is money management?
Money management in forex trading usually refers to following a set of trading rules and guidelines to minimize trading risks. Read Approaches of Risk Management in Forex Trading for methods of handling risks in forex trading.
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