| The
below mentioned FAQ has been created to assist
the potential investor understand the basic concepts
of the Foreign Exchange Market and in no way should
be construed as a detailed explanation of the
subject matter or as investment advice / results
of actual market experience. Please note that
past performance is not an assurance for future
results.
Table of Contents:
Scroll through the entire FAQ sheet or Click to
go to a topic below.
What is Foreign
Exchange?
Foreign Exchange is the simultaneous buying of
one currency and selling of another. Most of the
world's currencies are on a floating exchange
rate and are always traded in pairs, for example
Euro/Dollar or Dollar/Yen. With a daily average
turnover of approximately US$1.9 trillion (BIS
Survey-April 2004), the Foreign Exchange market,
also known as the "Forex" or "FX"
market, is the largest financial market in the
world.
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Where is the central location of the FX Market?
Unlike the stock and futures markets, FX Trading
is not centralized on an exchange. Due to the
fact that transactions are conducted between two
counterparts over the telephone or via an electronic
network, the FX market is considered an Over the
Counter (OTC) or 'Interbank' market.
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Who are the participants in the FX Market?
The reason that the Forex market is referred to
as an 'Interbank' market is 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 is a true 24-hour market and trading begins
each day in Wellington (extreme Eastern Coast
financial centre) and then moves around the globe
as the business day progresses – Sydney,
Tokyo, Hong Kong/Singapore, Middle East, Europe,
London, New York and finally San Francisco (Extreme
Western Coast of the globe). 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 (5
days a week).
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What are the most commonly traded currencies in
the FX markets?
The most frequently traded or 'liquid' currencies
are those of countries with stable governments,
respected central banks, and low inflation. Nowadays,
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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What is Margin?
Margin is a performance bond, or good faith deposit,
to ensure against trading losses. The margin requirement
allows you to hold a position much larger than
your actual account value. Most FCM’s /
Bank’s online trading platform performs
an automatic pre-trade check for margin availability,
and will only execute the trade if you have sufficient
margin funds in your account. The system also
calculates the funds needed for current positions
and displays this information to you in real time.
In the event that funds in your account fall below
margin requirements, the FCM / Bank will close
all open positions. This prevents your account
from ever falling below the available equity even
in a highly volatile, fast moving market.
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What does it mean have a 'long' or 'short' position?
A long position is simply one in which a trader
buys a currency at one price and aims to sell
it later at a higher price. 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 requires an investor
to go long in one currency and short the other.
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What is the difference between an "intraday"
and "overnight position"?
Intraday positions are all positions opened and
closed before 5:00 PM EST (rollover cutoff i.e.
the end of the international trading day). Overnight
positions are positions that are held through
5:00 PM EST (rollover cutoff), which are automatically
rolled forward by the FCM / Bank.
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How are currency prices determined?
Currency prices are affected by a variety of economic
and political conditions, but probably the most
important are interest rates, trade flows, inflation
and political stability. Sometimes governments
actually participate in the Forex market 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. Any of these factors,
as well as large market orders, can cause high
volatility in currency prices. However, the size
and volume of the Forex market makes it impossible
for any one entity to "drive" the market
for any length of time.
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How is trading risk managed?
Risk management is a complex subject by itself,
however, some basic type of orders like the limit
order and the stop loss order are the most common
risk management tools in FX trading. A limit order
places restriction on the maximum price to be
paid or the minimum price to be received. A stop
loss order ensures a particular position is automatically
liquidated at a predetermined price in order to
limit potential losses should the market move
against an investor's position. The liquidity
of the Forex market ensures that limit order and
stop loss orders can be easily executed. Certain
FCMs / Banks guarantee execution of stop loss
and other limit orders, at the specified price,
on all orders up to $1 million.
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What are the commonly used trading strategies?
Currency traders make decisions using both technical
factors and economic fundamentals. Technical traders
use charts, trend lines, support and resistance
levels, and numerous patterns and mathematical
analyses to identify trading opportunities, whereas
fundamentalists predict price movements by interpreting
a wide variety of economic information, including
news, government-issued indicators and reports,
and even rumors. The most dramatic price movements,
however, occur when unexpected events happen.
The event can range from a Central Bank raising
domestic interest rates to the outcome of a political
election or even an act of war. Nonetheless, more
often it is the expectation of an event that drives
the market rather than the event itself.
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How long are positions maintained?
As a general rule, a position is kept open until
one of the following occurs: 1) realization of
sufficient profits from a position; 2) the specified
stop-loss is triggered; 3) another position that
appears to have a better potential and you need
these funds.
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Procedural Table
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Client indicates interest in
our service |
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Risk Reward Management will
interview the client for suitability and brief
them about the risks involved |
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Risk Reward Management will
assist the client with the necessary documentation |
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Documents will be sent to the
FCM / Bank for processing |
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FCM / Bank scrutinizes the
application & related documents and (if
found in order) instructs the client to remit
the funds |
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Client remits the funds through
his bankers |
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On receipt of funds the FCM/Bank
activates the account and intimates the client
/ Advisor |
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Risk Reward Management commences
the advisory service |
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Client is informed of the progress
periodically |
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