Forex Trading Frequently Asked Questions
What is the Foreign Exchange Market?
The Forex (Foreign exchange) market is a giant and highly liquid financial market operating 24/5. The Forex market is a 100% decentralized market that is based on the Electronic Network of the banks (ECN). World currencies are traded within Forex in pairs and it is estimated that the daily volume activity in Forex today is reaching 4 trillion USD.
What is a Currency Pair?
A currency pair includes two currencies that indicate an exchange rate. For example the currency pair EUR/USD. The first quote of the two pairs (EUR in the example) is called the Base Currency. The second quote in the pair (USD in the example) is called the counter pair. All currencies are indicated with specific symbols, here are the most popular symbols:
- USD is the Forex symbol of the US Dollar
- EUR is the Forex symbol of the Euro
- GBP is the Forex symbol of the British Pound Sterling
- JPY is the Forex symbol of the Japanese Yen
- CHF is the Forex symbol of the Swiss Franc
- AUD is the Forex symbol of the Australian Dollar
- CAD is the Forex symbol of the Canadian Dollar
- NZD is the Forex symbol of the New Zealand Dollar
The most popular currency pairs are EUR/USD, USDJPY, and GBP/USD. Why popular pairs are important for traders? Because popularity means liquidity, and liquidity means narrower spreads. The magnitude of the spread defines to a high extent the profitability potential of any Forex trader.
What is a Dealing Desk Broker and what is a Non-Dealing Desk Broker?
A dealing desk Forex broker uses a dealing desk to provide its clients with pricing and execution. A no-dealing desk broker does not have a dealing desk and uses liquidity from external providers to execute trades. In general No-Dealing Desk (NDD) brokers are offering better trading conditions than dealing-desk brokers. NDD brokers are divided into ECN and STP Fx brokers.
What is a Market Maker Forex broker?
A market maker Forex broker provides pricing and execution by taking the opposite side of his clients' trading orders. A market maker Forex Broker earns from the spread between the bid and offers price. Usually spreads offered by Market Makers are very high and that is why professional traders prefer other types of brokerage, especially ECN Forex Brokers.
What is an ECN Forex Broker?
ECN means Electronic Communications Network and refers to the global banking network where currencies are traded against each other. A Forex ECN broker as it is already mentioned does not use a dealing desk instead, it passes his clients' trading orders directly to the ECN system without manipulation and intervention. Trades using the ECN network are executed with anonymity. Traders using the ECN network enjoy lower spreads and can observe live the market dept. Some ECN Forex brokers charge a trading commission along with the spread, others don’t.
What are Long and Short Positions when trading Forex?
A long position in Forex trading is a position that generates profits from an increase in the price of a currency pair. A short position is a position that generates profit from the decrease in the price of a currency pair.
What is the Spread, and Buy and Sell Quotes?
The spread is the difference between the buy and the sell quotes and it is measured in pips. For example, if GBP/USD is offered at 1.5500-1.5510, the spread is 10 pips.
-The buy quote is the price you can buy a base currency and it is displayed on the right. In the previous example of GBP/USD, it was 1.5510.
-The sell quote is the price you can sell a currency and it is displayed on the left. In the previous example of GBP/USD, it was 1.5500.
What is the Pip?
A pip is the smallest price increment of any currency pair. For example, as concerns GBP/USD the lowest price increment is 0.0001 which means that for GBP/USD 1 pip = 0.0001.
What is the Lot?
A lot in Forex trading is the standard unit size of any transaction. One standard lot usually it is equal to 100,000 units of the base currency. Other sizes include mini lots (10,000 units) and micro-lots (1,000 units).
What is Margin in Forex Trading?
Margin is the deposit required by a trader to open a trading position. Margin in an account can be either used or free. The used margin is already used for opening or maintaining a position, while the free margin can be used for opening new positions in the future. The amount of margin required is defined by the specific policy of each Forex Broker.
What is Trading Leverage?
The trading Leverage creates an opportunity to trade large amounts of Forex currencies. If you deposit 1,000USD for example and the leverage provided by your broker is 100:1, you can trade up to 100,000 USD. Usually, Forex Brokers are offering leverage of 100:1 to 200:1, in some cases the leverage can be up to 1,000:1. It sounds like easy money but actually, high leverage is the easiest way to lose all your funds. Why? Because as the leverage gets higher, the spread and the commission charged by your broker are getting higher too. When you trade using high leverage you must discipline your trading decisions and concentrate on the major pairs which are offered in narrow spreads. If you use high leverage in minor pairs (offered with spreads of 40-50 pips or even more), the probability of losing funds is huge.
What is Trading Slippage?
Slippage is the outcome of slow order execution and can highly disturb day-traders. The slippage is the difference between the price of your trading order and the price at which the order is finally executed. The slippage is measured in pips and it is much more intense in volatile markets. The effect of slippage is called also price manipulation. ECN brokers, in general, provide execution with less slippage than Market Makers do.
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