Forex FAQ (page 3)
Does it matter where I am located when I trade the Forex?
No, it doesn't. Since the trading is done online, you can trade from anywhere in the world that has internet access.
Can I trade options on foreign currency transactions?
A number of firms are presently offering options on off-exchange foreign currency contracts. Buying and selling forex options present additional risks, many of which are similar to those inherent in buying options on futures contracts.
There are two significant differences between buying off-exchange forex options and buying options on futures contracts. First, when you exercise an option on an exchange-traded futures contract, you receive the underlying exchange-traded futures contract. When you exercise an off-exchange forex option, you will probably receive either a cash payment or a position in the underlying currency. Second, NFA's options brochure only discusses American-style options, which can be exercised at any time before they expire. Many forex options are European-style options, which can be exercisedonlyon or near the expiration date. You should understand which type of option you are purchasing.
What is Margin?
Margin is a performance bond that insures against trading losses. Margin requirements in the FX marketplace allow you to hold positions much larger than the asset value of your account. Trading with WPP includes a pre-trade check for margin availability; the trade is executed only if there are sufficient margin funds in your account. The WPP trading system calculates cash on hand necessary to cover current positions, and provides this information to you in real time. If funds in your account fall below margin requirements, the system will close all open positions. This prevents your account from falling below your available equity, which is a key protection in this volatile, fast moving marketplace.
Why would I trade the FOREX?
Forex is a true 24-hour market. Whether it's 6pm or 6am, somewhere in the world there are buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately, and P&L is not affected by after hours earning reports or analyst conference calls.
After hours trading for U.S. stocks and futures brings with it several limitations. Electronic Communication Networks exist to bring together buyers and sellers - when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, traders must wait until the market opens the following day in order to receive a tighter spread.
What are "short" and "long" positions?
Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from changing market prices. Remember! Since currencies are traded in pairs, every forex position inevitably requires the investor to go short in one currency and long in the other.
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 Fx desk of WPP normal trading hours. Overnight positions are positions that are still on at the end of normal trading hours.
What are the five major currencies that you can trade?
Most trading platforms offer trading with: EUR (Euro), JPY (Japanese Yen), GBP (British Pound), CHF (Swiss Franc) and AUD (Aussie Dollar), all paired up against the USD.
How do I withdraw money from a trading account?
Most market makers would ask you to fax your request, and within 5 –7 working days, the money will be in your local bank account. Before completing an application form and transferring your money, it is best to check with the company you decide to trade through as they all have their own policy regarding administration of funds.
What happens if the rate changes at the very moment your order was entered?
That is the price you will get.
What do the terms "bid/ask" and "spread," mean?
Bid is the highest price that the seller is offering for the particular currency at the moment; Ask is the lowest price acceptable to the buyer. Together, the two prices constitute a quotation; the difference between the two is the spread, that is, the difference between the price offered by a dealer willing to sell something and the price he's willing to pay to buy it back. In a trading situation consider the figure $/Y 115.05/10. What this figure means is that the trading platform would be able to offer you yen at .05 but is willing to buy it back at 10. As a trader, the spread is inherently important to know because your desire to obtain or liquidate your position on the market will be effected by the spread.
How is pricing determined for certain currencies?
The full range of economic and political conditions impact currency pricing. It is generally held that interest rates, inflation rates and political stability are top among important factors. At times, governments participate in the forex market in order to influence the traded value of their currencies. These and other market factors such as very large orders can cause extreme relative volatility in currency prices. The sheer size of the forex market prevents any single factor from dominating the market for any length of time.
How can I manage risk?
The most common risk management tools in Forex trading are the stop-loss order and the limit order. The stop-loss order directs that a position be automatically liquidated at a certain price in order to guard against dramatic changes against the position. A limit order sets the maximum price that the investor is willing to pay in a transaction, as well as a minimum price to be received in exchange. The foreign exchange marketplace is so liquid that it is easy to execute stop-loss and limit orders.
What trading strategy should I use?
Both economic fundamentals and technical factors influence the decisions of currency traders. Those who follow economic fundamentals use government issued reports, current news, and broad economic trends to anticipate movements in price. Technical traders rely on trend lines, support and resistance levels, and a variety of charts and mathematical analysis to identify trading opportunities. Over time, the most significant price movements occur in close association with unexpected events. Perhaps the central bank changes rates without warning or an election puts an unexpected candidate in power. News from conflicts certainly impacts currency pricing. More often than not, it is the expectation of a certain event rather than the actual event that drives price pressures.
How often can trades be made?
As one might expect, trading activity on any particular day is dictated by current market conditions. Some small to medium size traders might make as many as 10 transactions in a day. By not charging commission and offering tight spreads, Washington Prime Plus Inc. investors can take positions as often as is necessary without concern for excessive transaction costs.
How long a position should be maintained?
Forex traders generally hold positions until one of three criteria is met:
1. A sufficient profit has been realized from the position.
2. A pre-set stop-loss order is triggered.
3. A better potential position emerges and the trader needs to liquidate funds to take advantage of it.
What's the difference between a demo and live trading account?
The only difference is that there is no capital at risk when trading on the demo system. Most online forex demo system are fully functional and, more importantly, the bid/ask rates available in the demo system are the exact rates available to live trading clients. The demo allows you to see the consistent Interbank dealing spreads and sample the ability to deal instantly from live, streaming quotes.
How do margin calls work?
A margin call is generated when the equity balance in an account drops below the margin requirement for that size account. If the maximum allowable leverage has been exceeded, any open positions are immediately liquidated, regardless of the nature or size of the positions.
What is the difference of Forex from Futures?
As a potential investor it is important for you to understand the differences between cash Forex and currency futures. In currency futures, the contract size is predetermined. Futures traders exercise leverage by utilizing Margin to control a futures contract. (Margin is money deposited by both the buyer and the seller to assure the integrity of the contract.)
But with liquidity in mind, the futures market may seem limiting because the data flow comes to a stop at the end of the business day (just as it does with the stock market) thus disrupting your perception of the market. For some traders this could lead to a certain level of anxiety. For example, if important data comes in from England or Japan while the U.S. futures markets are closed, the next day's opening could be witness to sharp movements..
In contrast to the futures market, the spot forex market is a 24-hour, continuous currency exchange that never closes. There are dealers in every major time zone, in every major dealing center (i.e., London, New York, Tokyo, Hong Kong, Sydney, etc.) willing to quote two-way markets. The size of this market, over one trillion dollars per day gives you near perfect liquidity. Because of the advantages of sheer volume and daily volatility, the excitement of this market is unparalleled.