Here’s a list of frequently asked questions about forex trading.
Forex is the name of the international interbank foreign exchange market (short for Foreign Exchange Market), one of the largest segments of the global financial industry, more information about this can be found here.
You earn money in Forex due to the difference in exchange rates. The trade mechanism is simple: you buy, for example, 1 Euro for $ 1.2 and wait until the Euro rises to 1.3 dollars. Once this happens, you sell the Euro and get a profit of $0.1.
It is the only market in the world that works around the clock, five days a week. The rapid movement of funds, low cost of transactions, and high liquidity makes Forex one of the most transparent of all businesses. Hence the most fair since you trade against the market.
The Forex market is a global OTC trading platform, and therefore does not have any particular trading location. There is a huge network of Forex market participants interconnected over the Internet, functioning as a single mechanism. These participants include Brokers and Liquidity Providers and connected Banks.
The main participants are commercial banks, companies engaged in foreign trade, central banks, and currency brokerage firms. Since the introduction of margin trading in 1986, everyone has an opportunity to invest available funds in the Forex market for profit.
Since the Forex market is open 24 hours a day Monday to Friday, the trader can closely monitor every movement of the market and react to it at any time. The Forex market opens on Sunday at 10:00pm (GMT) and closes on Friday at 10:00pm (GMT) – Nigeria Time from 12am on Sunday to 12am on Friday.
Based on the volatility indices, currency pairs were distributed (roughly) into the following groups:
*Aggressive: GBP / JPY (British pound / Japanese Yen), GBP / USD (British pound / US dollar);
*Moderately aggressive volatility on currency pairs such as: EUR / AUD (Euro / Australian Dollar), EUR / CAD (Euro / Canadian dollar);
*More or less stable and very popular among traders; currency pairs like: EUR / USD (Euro / US dollar), USD / CHF (US dollar / Swiss franc), USD / JPY (US Dollar / Japanese Yen);
*The “calmest” currency pairs suitable for beginners – EUR / GBP (Euro / British Pound), EUR / CHF (EUR / CHF)
Read more about currency pairs in How to Read a Forex pair? Bid and Ask.
In order to make forecasts about the fluctuation of a currency, it is necessary to pay attention to the factors that influence the formation of its supply and demand. The include the macro economy of the country, investment decisions – the possibility of large contracts in a particular currency, the political situation in the country issuing the currency, the level of confidence of the citizens and foreign investors, and even currency speculations can affect the rate.
As with all markets, the trader’s investment is at risk when making independent trades. It is important to understand this, and to think seriously about reducing the risk where possible in the Forex market. A competent trader who wants to increase the ratio of return / risk, should not be afraid to leave the market, limiting losses and abandon small profits. The use of this approach in practice can significantly increase income from trading in the Forex market.
A Forex Trading Strategy is a set of rules and techniques that you can follow to trade more profitable. Most successful traders use a variety of strategies, which can be developed and adjusted according to your preferences, experience and knowledge. Forex traders are often advised to use simple trading strategies, but it can be an elusive goal, because you need to distinguish between simple ones and complex ones that exist on the market. Therefore, it is crucial for your success to understand the factors that must be present in order to find a strategy that works for you.
Spread is the difference between the buy price and the sale price of the currency pair (Bid and Ask). For example, the purchase price of one unit of the currency pair is 1.55 dollars, and the sale price of one unit of the same currency pair is 1.5 dollars. If we measure the spread of money, it will be 0.05 dollars, but it would be correct to indicate the difference in points where the spread is equal to 5 points.
It seems logical that any services must be paid for, including trading Forex. Commission is the main kind of payment charged by brokers for their services. Forex brokers will charge you a commission when you open a position, in two possible ways:
a) The Spread amount.
b) A fixed amount of commission specified by the broker.
In the Forex market, currencies are sold in lots. A Standard unit lot in Forex is equal to 100 000 units of the base currency.
For a transaction to buy or sell currencies in the amount of 100 000 we choose = 1,00 lot, if 10 000 units then 0.1 lot, and if 1 000 units then 0.01 lot.
Buying 3 lots EUR / USD, we open a long position of 300 000 euros.
Selling 4 lots GBP / USD, we are opening a short position of 400 000 US dollars.
The concept of a Forex lot is used exclusively in the Forex market, the banks buy and sell currency in any arbitrary amounts.
We go into further detail in our article Lot, leverage and margin explained
There are 3 kinds of lot sizes:
● Standard lot = 1.00 (100,000 units of base currency).
● Mini lot = 0.10 (10 000 units).
● Micro lot = 0.01 (1000 units).
You can find brokers that offer as minimum as 0,001 lots (1 point – 1 cent), which are called “nano lots” or minimum lots in forex.
Margin is a deposit required to maintain open positions. This is not a commission or transaction cost, but simply part of the funds in your account, deferred and used as security deposit. Margin is calculated using the following formula:
Margin required = (current market price x Volume) / Account leverage
It should be noted that the amount in the formula must be specified in units rather than lots.
For example, you want to purchase 0.5 of a standard lot EUR / USD pair at the price of 1.24 with a leverage of 1: 1000.
We get the following calculation: (1.24 * 50 000) / 1000 = $ 62.
Free margin is the difference between the balance of your account, and margin of open positions:
Let’s say you have $ 10,000 in the account and you hold open positions with the total margin of $ 900, which give you a $ 400 profit. Therefore:
The Equity = $ 10,000 + $ 400 = $ 10 400
Free Margin = $ 10,400 – $ 900 = $ 9500
Margin Call and Stop Out in the Forex market are considered critical points.
Margin Call (Guarantee fee requirement) – This is the point where you will need to deposit more funds to keep your position(s) active/open for loosing positions. You will only get Margin Call for losing positions.
If after the margin call you don’t deposit additional funds on the trading account, and losses continue to grow, at a certain point the price will reach the Stop Out, and your brokerage company will automatically close a certain number of positions, possible even all open orders.
“Open a long position” or “take a long position” means buy the base currency, and vice versa, “short position” means sell the base currency.
Here is an example, a transaction for the purchase of 100 000 EURUSD means purchase of 100 000 euros for dollars. Thus, there is the opening of a long position in the euro.
BUY (buy) 100 000 EURUSD – a long position on the Euro.
SELL (sell) 100 000 EURUSD – a short position on the Euro.
To learn more and find helpful trading articles visit our Forex Education Section.