Forex Market FAQ
Q: Can the Forex market be manipulated?
A: No, the sheer size of the market makes it harder for any institution or bank to steer the direction of currencies. While there might be a sharp market response to Central Bank interventions or other economic changes, the impact is minor in most cases, and major manipulations are next to impossible. This levels out the playing field and makes the Forex market highly equitable, as opposed to other markets.
Q: Is the Forex market centralized or has a physical location?
A: No, unlike the stock market, the Forex market is basically an Over-The-Counter (OTC) market and is operated electronically and available 24/5 in all parts of the world.
Q: Who can participate in Forex trading?
A: Earlier, Forex trading was restricted to banks, but with the advent of online trading, it has now ventured into all market groups, with an increased participation noticed from institutions and individuals alike. Today, MNCs, international money brokers, futures and options brokers, speculators and hedge funds comprise the major participants.
Q: What are the most common currencies involved in Forex trading?
A: The US Dollar, Euro, British Pound, Japanese Yen, Swiss Franc, Australian Dollar and the Canadian Dollar account for 85% of daily transactions on the Forex market and are the most common currencies traded. EUR/USD is the commonly traded currency pair.
Q: How do I get started with trading over the internet?
A: If you’re a beginner, then we recommend that you get a demo account first, before executing trades for real. Once you’re comfortable with the platform, you can sign up for a live account and get started.
Step 1: To open a trade, click the ‘New Order’ button in the terminal.
Step 2: Enter your desired trading volume.
Step 3: Click on the bid button to sell or the offer button to buy.
Your deal will be confirmed online almost instantaneously. You can view your open order in the trading terminal, which is updated in real time with a change in market conditions.
Q: What does it mean when you’re said to have a short or long position?
A: In simple terms, long equals buying, and short equals selling i.e. you’re said to hold a long position when you’re buying a currency and a short position when you’re selling the currency. For instance, if you’re trading using the most common currency pair EUR/USD and are buying the Euro, this means you’re going long on Euro and short on the US dollar. Since Forex trading is executed in currency pairs, you will simultaneously be going long on one and short on the other.
Q: What is the spread? Why is it important?
A: In simple terms, the difference between the bidding price and the asking price for each currency is called the spread. At WesternFX, traders can benefit from the tighter spreads, resulting in substantial profits even at minimal price movements. Our normal spreads are between 1 and 3 pips (price interest points) and can go down to zero for the major currency pairs, thereby enriching your trading experience with us.
Q: What is swap rate and its impact?
A: Swap/rollover rate is the interest calculated on all the open positions you hold overnight. It is calculated based on the interest rate of each currency. Depending on whether you’re going long or short on the currency pair, your swap rate will vary. Since every trading position involving currency pairs requires you to go long in one and short in another, it means you stand to receive or pay the net interest rate differential between the two. Each currency pair has its own rate and is subject to change based on the market conditions. The rates are measured on a standard size of 1 lot (100,000 base units) and are posted by financial institutions on a daily basis.
If you’d like to view the latest Swap rates, login to the WesternFX MT4 platform and then:
1) Select View -> Market Watch
2) Right click on Market Watch.
3) Select Symbols and choose the currency pair you’d like to know the swap rate of.
4) Select Properties.
Q: What is margin and how do I calculate it?
A: Margin is the amount of money needed to open a position and maintain trade. It is often regarded as a ‘good faith deposit’ and is used by your broker to maintain your position. It is calculated based on the currency value of the chosen currency pair, the leverage you chose when you opened the account and the volume of the trade you’d like to make. You cannot open a new position if you don’t have enough free margin in your account.
To calculate the margin requirement: (Market Quote * Volume) / Leverage = $ Margin required. Here’s an example for better understanding of the same – to open 1 lot (100,000 base units) of EUR/USD at 1.431 with a 1:100 leverage = (1.431*100,000)/100 = $1,431, which equals the free margin you must have in your account to carry out the trade.
Q: Will I get a margin call if I don’t have any free margin?
A: No. Your free margin can fall down to a negative figure because all your trades will remain open until your equity level drops down to 20% or less of the required margin. In the example provided above, the required margin to open the trade is $1,431. If the available account equity falls down to $286.2 or less, it would be subject to a margin call.
Q: How do I manage risk while trading currencies?
A: While managing the size of your trades is one way to minimize the risk, you can also use stop loss and limit orders. A stop loss order limits your loss on a position by allowing you to set a loss limit which closes the position automatically. A limit order allows you to set the maximum price at which you can buy or sell, thus preventing the trade from being executed until the market price reaches that specified by you.
Q: How do I make a profit in Forex?
A: Profits are made by buying low and selling high. As opposed to the stock market, it is relatively easier to go long or short in Forex. For instance, consider that you are expecting the USD to rise against EUR. You have a $10,000 account with a 1:100 leverage, which puts your buying power at $ 1,000,000. You decide to sell 1 lot (100,000 in base currency at $10 per pip) of the EUR/USD pair at a market price of 1.2450. In order to protect your capital, you need to decide a stop loss. Let’s assume it to be 5% of your account, which means that you set your stop loss at 1.250 (50 pips or $500 risk). A few days later the EUR/USD stands at 1.2300 and you decide to close your position on the EUR. Your profit is 1.2450 – 1.2300 = 150 pips, which equals a profit amount of $1500, while risking an amount of $500.
Q: What factors influence the price of currencies?
A: Inflation, large scale economical and political events, central bank interventions and political instability can all have an impact on the currency prices.
However, this impact is limited. The huge size of the market limits or negates even the effect of central bank interventions and ensures that no single entity can control the Forex market for long. The general trend is that strong, developing and fast-growing economies see an appreciation in their currency value while countries with a poor economy will observe depreciation.
Q: What kind of trading strategies should I employ?
A: There is no fixed trading strategy that can translate into sure-shot success in the Forex market. Your trading strategies must derive from decisions that factor in both technical and economic concerns.
Technical trading strategies include keeping a track of oscillators, trend lines, support and resistance lives, price patterns and other mathematical analyses.
You can also predict price movements by keeping a close tab on the global news, interpreting major events, moves made by the government, and also other sudden or unexpected events such as election results, natural calamities, war and rising interest rates.
Q: I’m interested in Forex trading. How can I learn more and get started?
A: There are multiple channels providing resources on Forex trading with several related courses being offered online. However, learning the concepts alone does not suffice. The best way to learn is through exposure and a demo account will give you just that! Our Forex demo account enables you to learn and trade in a similar trading environment to the actual one, without any risk. Open a standard demo account with WesternFX today by clicking on the “Demo Account” button and fill out the account opening form.