Forex Markets Explained - Frequently Asked Questions

Q: What does the term Forex stand for?

A: Forex is the abbreviation or acronym for foreign exchange or foreign exchange market.

Q: What is the foreign exchange market?

A: The foreign exchange market, which also goes by the names Forex, ForEx and FX, is the largest financial industry in the whole world. It involves the simultaneous purchase of a currency and sale of another currency. In the foreign exchange market, the currencies are always traded in pairs such as Australian Dollar/British Pound, Philippine Peso/Japanese Yen, Swiss Francs/Korean Won, and Saudi Arabian Riyal/Thai Baht.

Q: Who is the owner of the foreign exchange market?

A: The truth is, nobody owns the foreign exchange market. It doesn't belong to a particular person, organization, institution, government, or country. The foreign exchange market is an Interbank market, which means that it is dependent only on the different transactions between two parties: the buyer and the seller.

Q: Is there a central location for the foreign exchange market? Where is it?

A: No, the foreign exchange market doesn't have a central location. As mentioned in the previous FAQ, the foreign exchange market is an Interbank market which means that it is only dependent on the exchange or the transaction between the buyer and the seller. Most of the transactions in the world of foreign exchange are done over a telephone conversation or via an electronic mail delivery.

Q: Who participates in the transactions of the foreign exchange market?

A: The participants of the foreign exchange transactions are the buyers and the sellers. Some of the foreign exchange market participants include commercial banks, global money managers, futures and options traders, central banks, registered broker dealers, international money brokers, investment banks, financial markets, local governments, multinational corporations, international money managers, and private speculators.

Q: What are the most commonly traded currencies in the foreign exchange market?

A: The most common currencies in the foreign exchange market are United States Dollars, European Union Euro, British Pound, Japanese Yen, Swiss Franc, Canadian Dollar, and Australian Dollars. The reasons why the mentioned currencies became the most common currencies in the foreign exchange market are because these countries have some of the lowest inflation rates, most stable governments, and most respected central banks in the world.

Q: What are the bases for the determination of the prices of the different currencies?

A: There are a lot of factors to be considered when it comes to the determination of the prices of the different world currencies. These factors include political stability, interest rates, fiscal policy, budget surplus/deficit and inflation rates. Some governments even participate in the foreign exchange market in order to influence the value of their currency by either cbuying to raise the currency price or by selling to lower the prices. The circumstance, where the government interferes with the different transactions of the foreign exchange market in order to influence the value of their currency, is called Central Bank intervention.

Q: When is the foreign exchange market open for trading?

A: The foreign exchange market is open for 24 hours a day. The trading proper starts in Sydney, Australia and it moves around to the other countries of the world. In Australia, the foreign exchange market opens at 22:00 GMT on Sundays and lasts until about 22:00 GMT on Fridays.

Q: How often are trades made in the foreign exchange market?

A: The nymber os trades can be mislaeading, but daily turnover is estimated to be over $3 trillion (USD).

Q: Is a foreign exchange trading a form of gambling?

A: No, foreign exchange trading is not a form of gambling but they do have some similarities. First off, both activities involves the release of cash into a situation that is surrounded by a number of risks. A huge amount of money is put on the line while the outcome of the process is yet to be known. It is often a binary win or lose situation and all the trader and the gambler manage to do is to pray for luck to be on their side once again. Also, the trends in both trading and gambling cannot be deciphered because they constantly change.

Q: What is a Margin?

A: A Margin is the deposited collateral that is used to secure open positions. The Margin may be in the form of cash, treasury bills, or other securities. It is a form of insurance against trading losses.

Q: What are the long and short positions and what are they for?

A: In the foreign exchange market, a long position and a short position are used to determine the profit of the position based on the movement of the price. The long position, which is sometimes called the “buy position”, indicates that the position will be in profit if the price increases while the short position, which is sometimes called the “sell position”, indicates that the position will be in profit if the price decreases.

Q: How long are the positions maintained in the foreign exchange market?

A: In the foreign exchange market, the traders hold the positions until they meet any of the three general criteria. The three criteria are the realization of a sufficient profit, the initiation of a preset stop-loss order, and the emergence of a better potential position: hedged or directional. The third criteria may be the result of a change in risk tolerance.

Q: What are intra-day and overnight foreign exchange positions and how do they differ from each other?

A: An intra-day and overnight foreign exchange position are the two positions which differ in the duration of time they were opened. An intra-day foreign exchange position is open during the 24-hour period after the closing of the normal trading hours while an overnight foreign exchange position is still open even after the normal trading hours that it is automatically rolled at competitive rates to the next day's price by the Foreign Exchange Capital Management.

Q: What is the best foreign exchange strategy to be used in trades?

A: Because the trends in the foreign exchange industry are dynamic and unpredictable, none of the strategies can be considered as the best among the all others. Most foreign exchange strategies are only good for one particular market climate and then under perform in the next. Investors and brokers must perform continuous market research and analysis in order to come up with a better financial strategy to extract consistent profits out of the markets.

Q: What are the things to avoid when associated with foreign exchange transactions?

A: In order for a person to succeed in the world of foreign exchange, he must first learn how to avoid being greedy, being fearful, and being sensitive. Too much greed may result to the occurrence of social dilemma, economic crisis, and political instability. A person with no self-esteem, no confidence in himself, and no faith in anything else will have a hard time dealing with foreign exchange issues. A person must have enough belief himself before he can face all the stress and pressure that comes with the foreign exchange industry so that he will be able to overcome every single obstacle that comes his way. Lastly, a foreign exchange guy must not be sensitive enough to allow himself to be affected by the media speculations and nonsense rumors that revolves around the world of foreign exchange.