What
is Foreign Exchange?
The Foreign Exchange market, also known as the "Forex"
or "FX" market, is the largest financial
market in the world, with a daily average turnover
of approximately US$1.5 trillion. Foreign Exchange
involves the simultaneous buying of one currency
and selling of another. The world's currencies mainly
float freely against each other and are always traded
in pairs, for example Euro/Dollar or Dollar/Yen.
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Where is the FX Market?
FX Trading is not based in any one place or places,
as with the stock and futures markets. The FX
market is considered an Over the Counter (OTC)
or 'Interbank' market, due to the fact that transactions
are conducted between two counterparties over
the telephone or via the internet or a private
electronic network.
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Who are the participants
in the FX Market?
The Forex market is called an 'Interbank' market
due to the fact that historically it has been
dominated by banks, including central banks, commercial
banks, and investment banks. However, the percentage
of other market participants is rapidly growing,
and now includes large multinational corporations,
global money managers, registered dealers, international
money brokers, futures and options traders, and
private speculators.
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When is the FX market
open for trading?
Forex trading begins each day in Auckland, and
moves around the globe as the business day begins
in each financial centre, first to Sydney, Tokyo,
then London, and New York. Unlike any other financial
market, investors can respond to currency fluctuations
caused by economic, social and political events
at the time they occur - day or night. It is truly
a 24-hour market, as there is always an active
range of counterparties. Currencies are traded
continuously from Monday morning (Sunday afternoon
Chicago/New York time) in New Zealand/Asia to
the close of the business week on Friday afternoon
in Chicago/New York.
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What are the most commonly
traded currencies?
The most commonly traded currency pair is EUR/USD,
also known as "Eurodollar". It accounts
for about 30% of all forex transactions. Next
is USD/JPY, with about 20% of turnover. GBP/USD
is the third major pair, known as "Cable",
with about 11%. The most often traded or 'liquid'
currencies are those of countries with stable
governments, respected central banks, and low
inflation. Today, over 85% of all daily transactions
involve trading of the major currencies, which
include the US Dollar, Japanese Yen, Euro, British
Pound, Swiss Franc, Canadian Dollar and the Australian
Dollar.
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Is Forex trading capital intensive?
No. ProForMa requires a minimum deposit of $5,000.
ProForMa allows customers to execute margin trades
at 1-3% leverage. It is important to remember
that while this type of leverage allows investors
to maximize their profit potential, the potential
for loss is equally great. A more pragmatic margin
trade for someone new to the FX markets would
be 5:1 or even 10:1, but ultimately this depends
on the investor's appetite for risk.
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What is Margin?
Margin is a safety net for a position. It is roughly
equivalent to the worst case scenario for a day.
If the market moves against a customer's position,
ProForMa will request additional funds through
a "margin call" for the next day. If
there are insufficient available funds, ProForMa
will close out the customer's open positions.
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What is a 'long' or 'short'
position?
In trading parlance, a long position is one in
which a trader buys a currency at one price and
aims to sell it later at a higher price (the sometimes
elusive buy low, sell high strategy). In this
scenario, the investor benefits from a rising
market. A short position is one in which the trader
sells a currency in anticipation that it will
depreciate. In this scenario, the investor benefits
from a declining market. However, it is important
to remember that every FX position involves being
long in one currency and short the other.
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How are currency prices
determined?
Currency prices are affected by a variety of economic
and political events and conditions, most importantly
interest rates, inflation, political stability,
economic strategy and speculative strategy. Governments
are also active in the Forex market, attempting
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. Sometimes the threat
of this action is enough to influence the price.
Any of these factors, as well as very large market
orders, can increase both volatility and currency
prices. However, the size and volume of the Forex
market makes it very difficult for any one entity
to "move" the market for very long.
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