Forex FAQ's (4)

How do I fund my account?

When trading the Forex online there are usually a few different ways to fund your account:

Credit Card - The fastest way to fund your account
Bank or Cashier's Check
Personal or Business Check
Wire Transfer

What happens to my open positions at the end of the trading day?

Most online forex brokers will automatically roll forward all open positions to the next day's value date at the end of each business day.

How much money do I need to open an account?

The minimum deposit to open a trading forex account online with most trading companies is around 20 USD using a credit card. You might require to wire at least 2500 USD with most online forex brokers when wiring the funds straight from your bank account.

Can I place profit limit and stop loss orders?

Yes, they are strongly recommended. The stop rate is used as a backup to close the position when the market moves against it to protect you from further losses. When the market reaches this value the position is closed. The profit limit rate is used as a profit limit. When the market reaches this value, your position is closed.

How much am I willing to risk?

*What is my upside and downside potential?
*What are the market conditions? Is the market volatile or calm?
*What is the logic behind entering this trade?
*When will “I” know if the assumptions/logic behind the trade is right or wrong?

Having answers to these questions is not enough. Being able to articulate a definite plan and then execute it is, in National Academy of Forex’s view, a necessary pre-condition for being a successful trader. Many are able to develop excellent plans yet do not have the discipline to carry the plans to fruition. Emotions get in the way of individuals being able to execute their trading strategies. Trading decisions are business decisions and should not be decided on an emotional basis.

What is the spot market and on what exchange is it traded?

In the Wall Street Journal, one can read quotations for the spot rate, forward rate, and options. At the spot rate, currencies can be exchanged within two days i.e. on the spot. The word market is a slight misnomer in describing Forex trading, since there is no central location where trading takes place. The bulk of trading is between 300 large international banks, which process transactions for large companies and governments. These institutions are continuously providing prices for each other and the broader market. The most recent quotation from one of these banks is considered the market's price for that currency. Forex trading is not bound to any one trading floor, but done electronically between a network of banks continuously and over a 24-hour period.

What is the difference between futures and spot trading?

When you are dealing in Yen or CHF in the futures market, you are buying a currency contract based on a forward date, dealing in standardised contracts made and traded on an exchange that is chartered and licensed to serve as a trading arena in specific futures contracts. Spot trading in the Forex market is different. A forward market is one in which people agree to trade a commodity at a fixed price at some future date. In the Spot market, the price in question is that for immediate delivery i.e. within two days. You can also think of spot trading as the money exchange (Bureau de Change or cambio) you have to deal with when you travel when exchanging one currency for another. Depending on the rate, one USD will get you so many Lire or Yen or GBP, because you are trading a pair of currencies, one for the other.

What is a "margin call?"

A Margin call is the liquidation of one’s positions due to an inability to meet margin requirements. When one’s account balance is no longer able to cover one’s minimum margin requirement one’s positions are closed automatically. Due to the fact that margin requirements are so low the Trader will not receive a margin call warning, but will instead be closed out automatically. Due to this policy, no client has ever lost more money than they had in their account, though it is theoretically possible. Were the market to gap at the same time your positions were being closed due to margin you could theoretically get a closing price much lower than the price you would receive under normal market conditions. Most trading platforms require a minimum margin requirement of between $2000 and $5000. This once again depends on the company you trade through.

Why a bull trend in chart is a bear trend in value?

Similarly, our use of words such as "up" and "down", or "bullish" and "bearish" are meant to intuitively follow or reflect the visual chart direction of trade of a currency, not necessarily its value against USD. In case of JPY, CHF, and CAD, their bullish trend in chart means bearish trend in value. For example, if we say, "JPY is expected to slide back down from 120.00 to 118.00," we mean that yen's chart movement pattern is to turn south while its value is to strengthen against dollar from the weaker rate of 120.00 to the stronger rate of 118.00. One would have to get used to it in order to elude the confusion, and one usually does in time.

What should I do if prices on my screen do not update?

Check your connection to the Internet, then your service provider and then try calling the company that you are trading through.

Can I deal over the phone?

Yes. Most market makers offer clients the option of dealing with their Dealing Desk either over the Internet or in the more traditional manner - over the phone.
What is a trading session?
A trading day (or session) starts at the open of the Asian and Pacific Markets at 12h30 (CET – Central European time) and ends at the close of New York market (NYC) at 11:00 CET the following day.

What is a profit/loss point value?

Pip or point value depends on the leverage or gearing of the investment. With most companies, the pip value is about $10, depending on the exchange rate and interest rate differentials between currencies.

Why is Swiss Franc called "CHF" on the Forex market?

Swiss Franc CHF
German mark DEM
British pound GBP
Japanese yen JPY
Canadian dollar CAD
Australian dollar AUD
Chinese yuan CNY

What is the difference between Demo and Live Trading?

There is no difference except for the fact that a demo account uses fictitious money and the live account uses real money.

Do all of the units I’m trading of a particular currency get closed when I only want to close one unit at a time?

Yes and No. Only on some trading platforms can you choose the amounts in units of a currency that you want to liquidate or close at any given time. Once again, here you need to check with the company that you are trading through.

Forex FAQ's (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.

Will a Stop-Loss order be filled at the exact exchange rate, which the order is placed?

Yes mostly. Trading systems are programmed to do that but once again – check with the company that provides the trading platform that you will trade on. Unfortunately, on some

other systems you do get filled at the next price.

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.)

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.

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.

Forex FAQ's (2)

How can I trade foreign currency exchange rates?

As you can see from the example, currency exchange rates fluctuate. As the value of one currency rises or falls relative to another, traders decide to buy or sell currencies to make profits. Retail customers also participate in the forex market, generally as speculators who are hoping to profit from changes in currency rates.

How does the off-exchange currency market work?

The off-exchange forex market is a large, growing and liquid financial market that operates 24 hours a day. It is not a market in the traditional sense because there is no central trading location or "exchange." Most of the trading is conducted by telephone or through electronic trading networks.

The primary market for currencies is the "interbank market" where banks, insurance companies, large corporations and other large financial institutions manage the risks associated with fluctuations in currency rates. The true interbank market is only available to institutions that trade in large quantities and have a very high net worth.

In recent years, a secondary OTC market has developed that permits retail investors to participate in forex transactions. While this secondary market does not provide the same prices as the interbank market, it does have many of the same characteristics. How are foreign currencies quoted and priced? Currencies are designated by three letter symbols. The standard symbols for some of the most commonly traded currencies are:

EUR — Euros
USD — United States dollar
CAD — Canadian dollar
GBP — British pound
JPY — Japanese yen
AUD — Australian dollar
CHF — Swiss franc

Forex transactions are quoted in pairs because you are buying one currency while selling another. The first currency is the base currency and the second currency is the quote currency. The price, or rate, that is quoted is the amount of the second currency required to purchase one unit of the first currency. For example, if EUR/USD has an ask price of 1.2178, you can buy one Euro for 1.2178 US dollars.

Currency pairs are often quoted as bid-ask spreads. The first part of the quote is the amount of the quote currency you will receive in exchange for one unit of the base currency (the bid price) and the second part of the quote is the amount of the quote currency you must spend for one unit of the base currency (the ask or offer price). In other words, a EUR/USD spread of 1.2170/1.2178 means that you can sell one Euro for $1.2170 and buy one Euro for $1.2178.

A dealer may not quote the full exchange rate for both sides of the spread. For example, the EUR/USD spread discussed above could be quoted as 1.2170/78. The customer should understand that the first three numbers are the same for both sides of the spread.

What transaction costs will I pay?

Although dealers who are regulated by NFA must disclose their charges to retail customers, there are no rules about how a dealer charges a customer for the services the dealer provides or that limit how much the dealer can charge. Before opening an account, you should check with several dealers and compare their charges as well as their services. If you were solicited by or place your trades through someone other than the dealer, or if your account is managed by someone, you may be charged a separate amount for the third party's services.

Some firms charge a per trade commission, while other firms charge a mark-up by widening the spread between the bid and ask prices they give their customers. In the earlier example, assume that the dealer can get a EUR/USD spread of 1.2173/75 from a bank. If the dealer widens the spread to 1.2170/78 for its customers, the dealer has marked up the spread by .0003 on each side. Some firms may charge both a commission and a mark-up. Firms may also charge a different mark-up for buying the base currency than for selling it. You should read your agreement with the dealer carefully and be sure you understand how the firm will charge you for your trades.

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.

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 do I close out a trade?

Retail forex transactions are normally closed out by entering into an equal but opposite transaction with the dealer. For example, if you bought Euros with U.S. dollars, you would close out the trade by selling Euros for U.S. dollars. This is also called an offsetting or liquidating transaction.

Most retail forex transactions have a settlement date when the currencies are due to be delivered. If you want to keep your posi- tion open beyond the settlement date, you must roll the position over to the next settlement date. Some dealers roll open positions over automatically, while other dealers may require you to request the rollover. Most dealers charge a rollover fee based upon the interest rate differential between the two currencies in the pair. You should check your agreement with the dealer to see what, if anything, you must do to roll a position over and what fees you will pay for the rollover.

How do I calculate profits and losses?

When you close out a trade, you can calculate your profits and losses using the following formula:

Price (exchange rate) when selling the base currency - price when buying the base currency X transaction size = profit or loss

Assume you buy Euros (EUR/USD) at 1.2178 and sell Euros at 1.2188. If the transaction size is 100,000 Euros, you will have a $100 profit.

($1.2188 - $1.2178) X 100,000 = $.001 X 100,000 = $100

Similarly, if you sell Euros (EUR/USD) at 1.2170 and buy Euros at 1.2180, you will have a $100 loss.

($1.2170 - $1.2180) X 100,000 = - $.001 X 100,000 = - $100

You can also calculate your unrealized profits and losses on open positions. Just substitute the current bid or ask rate for the action you will take when closing out the position. For example, if you bought Euros at 1.2178 and the current bid rate is 1.2173, you have an unrealized loss of
$50.

($1.2173 - $1.2178) X 100,000 = - $.0005 X 100,000 = - $50

Similarly, if you sold Euros at 1.2170 and the current ask rate is 1.2165, you have an unrealized profit of $50.

($1.2170 - $1.2165) X 100,000 = $.0005 X 100,000 = $50

If the quote currency is not in US dollars, you will have to con- vert the profit or loss to US dollars at the dealer's rate. Further, if the dealer charges commissions or other fees, you must subtract those commissions and fees from your profits and add them to your losses to determine your true profits and losses.

Is trading at night as good as day, or week ends?

The Forex market is not open on weekends, but is open 24 hours a day from Sunday evening to Friday afternoon. While the Forex market is open, trades can and do happen at all times and on every currency pair. The manuals suggest some times when trades might happen a little more frequently, but you can find them any time. Even the techniques related to news announcements can be traded around your current schedule.

How much money do I need to trade forex?

Forex dealers can set their own minimum account sizes, so you will have to ask the dealer how much money you must put up to begin trading. Most dealers will also require you to have a certain amount of money in your account for each transaction. This security deposit, sometimes called margin, is a percentage of the transaction value and may be different for different currencies. A security deposit acts as a performance bond and is not a down payment or partial payment for the transaction.

Dealers who are regulated by NFA are required to calculate and collect security deposits that equal or exceed the percentage set by NFA rules. Although the percentage of the security deposit remains constant, the dollar amount of the security deposit will change with changes in the value of the currency being traded.

The formula for calculating the security deposit is:

Current price of base currency X transaction size X security deposit % = security deposit requirement given in quote currency

Returning to our Euro example with an initial price of $1.2178 for each Euro and a transaction size of 100,000 Euros, a 1% security deposit would be $1,217.80.

$1.2178 X 100,000 X .01 = $1,217.80

Security deposits allow customers to control transactions with a value many times larger than the funds in their accounts. In this example, $1,217.80 would control $121,780 worth of Euros.

Value of Euros = $1.2178 X 100,000 = $121,780

This ability to control a large amount of one currency, in this case the Euro, using a very small percentage of its value is called leverage or gearing. In our example, the leverage is 100:1 because the security deposit controls Euros worth 100 times the amount of the deposit.

Since leverage allows you to control large amounts of currency for a very small amount, it magnifies the percentage amount of your profits and losses. A profit or loss of $1,217.80 on the Euro trans- action is 1% of the full price (with leverage of 1:1) but is 100% of the 1% security deposit. The dollar amount of profits and losses does not change with leverage, however. The profit or loss is $1,217.80 whether the leverage is 100:1 or 25:1 or 1:1.

The higher the leverage, the more likely you are to lose your entire investment if exchange rates go down when you expect them to go up (or go up when you expect them to go down). Leverage of 100:1 means that you will lose your initial invest- ment when the currency loses (or gains) 1% of its value, and you will lose more than your initial investment if the currency loses (or gains) more than 1% of its value. If you want to keep the position open, you may have to
deposit additional funds to maintain a 1% security deposit.

Some dealers guarantee that you will not lose more than you invest, which includes both the initial deposit and any subse- quent deposits to keep the position open. Other dealers may charge you for losses that are greater than that amount. You should check your agreement with the dealer to see if the agree- ment limits your losses.