Foreign currency market is emerging as one of the most popular options for investor trading. However, forex market’s working still remains a mystery for the general investor who is unaware about its working and asks a number of questions. Let’s have a look at some of the common queries in the minds of investors.
1) What Is Forex?
Foreign Exchange market is a global market wherein the currencies of various countries are bought and sold. The trading is always done pair-wise, wherein one currency is sold and another is bought at the same time.
2) Where Is The Forex Market Located?
The forex market is not located at one place or exchange. Instead, it operates over an electronic network that connects banks, traders and investors across the world. Transactions in this market are largely conducted over the phone or through the net.
3) Who Are The Participants Of The Forex Market?
Till a couple of years back, the forex market was dominated by banks of the various countries and considered to be an inter bank market. However, in the recent years, large multinational corporations, brokers, forex dealers, money managers and even private investors have entered the arena.
4) What Are The Timings Of This Market?
This market operates on a continuous basis for 24-hours, seven days a week. Unlike other financial markets, trading in forex is possible at any given time of the day or night since traders at one or the other location would be working at that time. The market opens in Sydney and shifts to other financial centers as the day begins there. Tokyo, London and New York are also the major centers of forex trading.
5) Which Currencies Should Be Traded In?
Although currencies of almost all countries are traded on the forex market, a majority of trading is done in a few currencies. The currencies of countries that have a stable government and economy, and the ones that play an important role in the global financial world are the most traded ones and are considered to be highly liquid. Nearly 85% of the trades in the forex market are done in the US Dollar, the GBP, the Japanese Yen, the Australian Dollar, the Euro, the Canadian Dollar and the Swiss Franc.
6) How Are The Various Currencies Traded?
The currency trading is done in LOTS, with each LOT containing a specific amount of currency. A trader generally opens a margin account which gives him the right to trade in a lot.
7) What Is A Margin Account?
A margin account requires the investor or the trader to keep a certain amount of money. This will ensure that one would be able to pay off the losses, if any are incurred during a trade. The margin accounts are generally overseen by the brokers who ensure that an investor does not overstep his margin amount. The margin account is used to deposit the profits earned on your trades and to withdraw the amount required to settle the losses on your trades.
8) How Much Money Does One Need To Invest In The Forex Market?
Not much. This market provides investors with an opportunity to trade at levels much higher than the initial money invested. This is called as leverage. The standard leverage allowed is 100:1, meaning that one can trade in currencies which are 100 times more than the amount invested. This leverage allows an investor to maximize the investor potential. But one should be aware that this same leverage also raises the risk potential and so should be used carefully. It is advisable that a new investor starts with a mini account that provides a leverage of around 20:1 and then move ahead gradually.
9) What Are Long And Short Positions?
The long position refers to the purchase of a currency in anticipation that its price will rise at a later date. A short position refers to the sale of a currency with an expectation that the same can be bought back at a later date at a lower price. Any trade in forex means that one would take a long position in one currency and a short position in the other one.
10) Which Factors Move Currency Prices?
Currency markets are largely demand and supply driven, which are in turn dependant on a number of factors. A country’s economic and political stability is the main driving force behind its currency. Any change in the level of inflation, interest rates, any other economic factor or political climate leads to an immediate movement in the forex market. Sometimes, the government of a country enters the forex market through its central bank and tries to drive their currency’s value to the desired levels. One needs to remember that it is usually the expectation of an event or an announcement that drives the currency values rather than the event itself. Although a large number of factors drive the forex market, the latter’s huge size and magnitude make it impossible for anybody or any factor to influence the currency movements for a long period of time.
11) What Are Intraday And Overnight Trades?
Intra day positions are the positions taken during the normal course of the 24-hour trading day and closed before the end of the day. In contrast, overnight trades are positions that still hold at the end of the 24-hour trade. In such a case, the market maker tends to roll over the investors’ positions at competitive rates to the next day’s prices.
12) How Can The Risk Be Managed In Currency Markets?
Limit and stop loss orders are the most effective tools in limiting one’s risk in forex trading. The limit order restricts the maximum price to be paid for purchasing a currency or the minimum price to be received for selling a currency. A stop loss order is used to ensure that one’s position is liquidated at a pre-determined price.
13) What Do The Terms: Bid, Ask And Spread Mean?
Bid is the highest price at which the seller is willing to sell and ask is the lowest price acceptable to the buyer. The difference between these two prices is called as the spread.