Frequently Asked Questions About Forex

What is Forex?

The off-exchange retail foreign currency (Forex) market is an over-the-counter (OTC) asset class that allows traders to exchange one currency for another. It is one of the largest markets in the world and involves central banks, institutions, and individual currency traders attempting to take advantage of fluctuations in exchange rates.

• Forex vs. Stocks: Instead of trading shares of companies, you trade currencies such as the US Dollar, Japanese Yen, and British Pound.
• $4 trillion traded every day: Forex is one of the largest markets in the world, creating a liquid trading environment.
• Buy or Sell: You can buy or sell at any time, so you can take advantage of the market whether it is going up OR down.
• 100:1 Leverage: You can open an account with a small amount of capital and, with to up to 100:1 leverage, you can move a lot of currency with that small amount.
• 24/5.5: The Forex market is open 24 hours a day, 5.5 days a week. No matter your schedule, you can find time to trade.

Who participates in the market?
The major players in the Foreign Currency Exchange market are the major financial and central banks. Secondary players are institutions such as large companies or investment companies. Through over the counter (OTC), electronically traded Forex, retail traders are still a small, but growing section in the Foreign Currency Exchange market.

Is there a central exchange?
Because the Forex market is globalized and open twenty four hours a day, it is not standardized and has no central exchange. All trades are made over the counter (OTC), off-market instead of through an exchange.

What is leverage?
Leverage is using a small amount of money to control a larger amount of money. Usually, the trader will deposit a small amount of money with the broker (called margin) which allows them to then use the broker’s funds to trade currencies. Without this, it would be impossible to make profit in the market, seeing as currency rates only move in fractions of cents. With the large amount of money controlled through using leverage, however, those fractions of cents translate into fair amounts of money. it must be noted that leverage works both ways: it can be useful in the fact that it maximizes profit, but it can also maximize loss just as easily.

What is margin?
Margin is the money you deposit at the broker in order to use a larger amount of money through leverage. While at the broker, this money is somewhat protected from loss through something called a margin call. If the profit/loss of a trade starts to near the amount of margin deposited, the broker will close out the trade, saving most if not all of the margin deposited. This does not mean you can’t lose the rest of your money however; just not the money deposited as margin.

Can you sell as well as buy?
Unlike other markets, in Forex it is possible to both buy and sell an instrument. Because of the relative nature of currency pairs, a trade is essentially buying one currency against another. In order to sell, all that would need to be done is to buy the opposite currency in the pair against the first one. Instead of flipping around the different currencies in a pair for each trade, this is simply shown as a sell or short position. Any currency pair available can be either bought or sold.

How are currency pair prices determined?
Currency pair prices are simply the exchange rates of the two currencies involved. The EURUSD price is simply the amount of USD for one EUR. The AUDJPY price is simply the amount of JPY for one AUD. In a Forex quote there are usually two prices: the bid and ask. Bid is the selling price and ask is the buying price. The difference between the two prices is called the spread.

Where can I learn more about Forex?
See below for more information on learning how to trade currencies from Forex professionals...

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