Forex Education: Forex FAQ - frequently asked questions

What is Foreign Exchange?

The foreign exchange market, also referred to as the "foreign currency," "forex" or "fx" market, is the largest financial market in the world with daily average transactions of approximately U.S. $2 trillion. The world's currencies are on a floating exchange rate and are always traded in pairs, for example Euro/U.S. Dollar or U.S. Dollar/Yen. Foreign Exchange is simply the simultaneous purchase of one currency and selling of another.

Is there a central location for the Forex Market?

Forex trading is not managed through an exchange. Since transactions are conducted between two counterparts, the FX market is an “inter-bank,” or over the counter (OTC) market.

Who participates in the FX market?

Central, commercial and investment banks have traditionally dominated the Forex market. Other market participation is rapidly increasing, and now includes international money managers and brokers, multinational corporations, registered dealers, options and futures traders, and private investors.

When is the FX market open for trading?

Forex is a true global 24-hour marketplace. The trading day begins in Sydney, and moves around the globe as each financial center comes to life. Tokyo follows, then London, and finally New York. Investors can respond in real time to any fluctuations caused by current economic, social and political events.

Which time interval is the best for entering a trade?

There is no single time frame. The best approach is using several at one time.

What is the best time of the day to trade?

Forex is a 24/7 market from Sunday evening to the Friday close of the New York session. This does not mean that anytime is the best time to trade. The best time to trade is when the currency pair is meeting the conditions the trader has established for the trade. When a winning pattern appears, it's the best time to trade.

When does Forex trading occur?

The first session, which is the Tokyo Session, begins each week on Monday morning in the Asia-Pacific region which is Sunday evening in the Americas. Trading continues non-stop moving into the London Session and on to the New York Session until all markets close on Friday afternoon.

How fair is the Forex Market?

The Forex market is so large and is composed of so many participants that no one player, not even a large government, can completely control the long-term direction of the market. So, many experts have called Forex the “most level playing field” on earth.

What are the most common currencies in the Forex markets?

The most “liquid” currencies in the Forex market are those of countries with low inflation, stable governments, and respected central banks. Nearly 85% of daily transactions involve the major currencies, including the U.S. Dollar, Japanese Yen, the European Union Euro, British ound, Swiss Franc, and the Canadian and Australian Dollars.

What is Margin?

Forex 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.

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.

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.

What are the most commonly traded currencies in the forex market?

The most often traded or "liquid" currencies are those of countries with stable governments, respected central banks and low inflation. Most forex transactions involve trading of the "major" currencies which include the US Dollar, Japanese Yen, Eurocurrency, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar.

How are currency prices determined?

Currency prices are affected by a variety of economic and political conditions, the most important of which are interest rates, inflation and political stability. Moreover, governments sometimes participate in the forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as central bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the forex market makes it virtually impossible for any one entity to "drive" the market for any length of time.

What is the U.S. dollar as an instrument for trading?

Everyone refers to the U.S. dollar. But what does it really refer to when a trader considers action? The U.S. dollar can be an instrument for trading through the U.S. Dollar Index (USDX) traded on the New York Board of Trade. The USDX is recognized by hedge fund traders and worldwide as the instrument reflecting sentiment on the U.S. dollar. An additional way to trade the dollar is through any of the major currency pairs. The EUR/USD, the USD/CHF and other pairs with the dollar as part of the pair allows a trader to trade for or against the dollar but relative to the other pair.

What is the name of the Chinese currency?

The Renminbi.

Which currency pair allows you to trade the British pound against the euro?

This is called a cross pair - the EUR/GBP.

How is a cross pair different than the majors?

The dollar is not part of the pair. This leads to less volume and liquidity. The spread may be wider as a result.

Which six currencies compose the U.S. Dollar Index?

The surprising aspect to the composition of the U.S. Dollar Index is that it includes obscure currencies. It is composed of:
EUR 57.6%
USD/JPY 13.6%
Pound 11.9%
Canadian dollar 9.1%
Sweden Krona 4.2%
Swiss franc 3.6%

Why is the Spot Currency Market Attractive to Investors?

Professional investors for individual accounts have dramatically increased their level of participation in the cash Forex markets in recent years. Add to this the growing use of cash Forex by individual investors and you have a rapidly growing investment arena. The following summarizes the many reasons professional investors have flocked to this market. Liquidity This market can absorb trading volumes and per trade sizes that dwarf the capacity of any other market. On the simplest level, liquidity is a powerful attraction to any investor as it suggests the freedom to open or close a position at will. Access a substantial attraction for participants in the Forex market is the 24-hour nature of the market. In Forex, a participant need not wait to react to a news event, as is the case in most markets. Flexible Settlement Many professional investment managers have a particular time horizon in mind when they establish a position. In the Forex market, a position can be established for a specific period of time which the investor desires.

What is the technical basis for locating a stop loss?

Stops should technically be where the trade no longer makes sense. If you're buying a currency pair, ask yourself at what point would you be selling it? Or if you're selling the pair, at what point would you be buying it? The answer is a good first approximation as to where the stop should be technically. Remember, also consider the risk involved and cash management.

What are the four strategies for trading a sideways pattern?

Sideways patterns at first appear to be telling us that nothing important is going on. Doing nothing is in fact a trading strategy. Yet, if you are trading sideways patterns consider the following several strategies:
a) Do nothing and wait for a breakout.
b) Play a break off resistance.
c) Play a break off support.
d) Play a bounce off support.
e) Play a bounce off resistance.

What information does a candlestick pattern provide that is not in a bar chart?

Candlestick aficionados may argue this one, but the answer is that both candlesticks and bars provide the same information. Both provide low and high and open and close price.

Which Fibonacci level is the most important?

It is generally considered that the 61.8% Fib line is the most important. But, it's important to see what the prices are doing around any Fib lines. If the 32.8% Fib line seems to be showing that it is a line of resistance or support, then it becomes important to treat seriously.

What is the most important report that affects trading the yen and when does it come out?

The Japanese quarterly survey, the Tankan report, which is released April 1. A good place to check it out is www.boj.or/jp/en.

When the Federal Reserve Open Market Committee meets, what does it decide?

This committee decides on the short-term rates that banks have to have. Long-term rates are decided by the market auctions.

When trading forex, what is the cost of the trade when there is no commission?

Remember that there is no free lunch. The trader pays the spread between the bid and the ask price.

What are the two basic trading strategies for buying or selling as applies to any time frame?

One can start shaping a trading strategy by looking to where the price may find support or resistance. Then the trading strategy can be developed on whether to trade the break or failure to break those support or resistance areas.

What's the major problem with using moving averages?

They are all lagging indicators.

What is the average duration of a profitable trade generating 20 pips?

In other words, how long should one wait to be profitable after they enter a trade and capture 20 pips? Well, perhaps it depends on one's own patience and temperament. But a 20-pip move should occur, on a well-timed trade within an hour.

When you see a parabolic pattern, what does it predict about the imminent movement of the market?

Think of the path a ball takes when thrown to another person. It follows a parabolic path. When one sees a parabolic path reach its height it's a reversal indicator.

What is the most important fundamental piece of information to track before you decide to trade a currency pair?

Make sure you know if there is an economic news report about to be released.

How do you obtain free and professional advice?

The Internet is filled with good analysis and opinions on many sites. But remember the phrase- caveat emptor: Let the buyer beware.

What pattern always precedes a break of support or resistance?

Before a price has enough energy to break a pattern it is in there are signs of hesitancy. The range narrows and then a break occurs.

What is the definition of a "false" breakout?

The concept of a false break is really misleading. When a price breaks a support or resistance line, it has either tried to or may have closed above or below it, but then returned to the previous range. So a false break is really one that is short lived.

What is the best way to spot a trend reversal?

If the currency pair has succeeded in breaking through the 61.8% Fibonacci level of a weekly or daily move a trend reversal is a serious probability.

Which indicator compares the performance of two different trading systems?

There are several, but a useful one is maximum drawdown. If two different trading systems resulted in the same total return, look to which one had a tendency to lose more. The system that had greater drawdowns is more volatile.

Which key moving average period should be watched to indicate a trend reversal?

The 50-day simple moving average acts as a confirmation of a trend change.

When are technical indicators totally useless in determining your next trade?

Right before an economic news calendar report technical indicators get set aside as the market hesitates. Also, during a sudden move such as a response to a terror attack or unexpected news. The market will need time to recalibrate and then technical indicators work.

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.