Frequently Asked Questions
Currency Trading
What is currency exchange?
Also referred to as foreign exchange, FX or Forex, currency exchange is the
trading of one currency against another. In terms of trading volume, the currency
exchange market is the world's largest market, with daily trading volumes in
excess of $1.5 trillion US dollars. This is orders of magnitude larger than
the bond or stock markets. The New York Stock Exchange, for example, has a daily
trading volume of approximately $50 billion.
Why trade currencies?
Currencies are traded for hedging and speculative purposes.
Corporate treasurers, private individuals and investors have currency exposures
during the the regular course of business. The BizFOREX IFT Trade Platform is an
ideal platform to hedge any such exposure. An investor, who has bought a European
stock and expects the EUR exchange rate to decline, can hedge his currency exposure
by selling the EUR against the USD.
Currency markets are ideally suited for speculative trading. The spread is the cost that a trader incurs when taking a position. The volatility
is a measure of maximum return that the trader can generate with perfect foresight.
For currency markets this ratio is approximately 500, which is spectacular -
it indicates that a trader can generate high levels of profitability from trading
currencies. This compares with a ratio of only 60 to 100 for the most liquid
stocks. In other words, a trader can earn approximately 5 times more money from
currency trading than equity trading assuming the same market expertise.
The foreign exchange market has a daily volume in excess of 1.5 trillion USD,
which is 50 times the size of the transaction volume of all the equity markets
taken together. This makes the foreign exchange market by far the most liquid
and efficient financial market of the world. Thanks to its efficiency, there
is little or no slippage of market price for the execution of even large buy
and sell orders. Traders are able to take advantage of intra-day volatility
thanks to the low spreads and enter positions for short time periods, such as
minutes and hours. Unlike equity trading, where restrictions limit a trader's
ability to profit from a market down turn, there are no such constraints on
currency trading. Currency traders can take advantage of both up and down trends
thus increasing their profit potential.
Who participates
in the FX market?
Historically, smaller-scale, individual investors have had limited access to
the FX market. Major banks, multinational corporations and other participants,
trading in large transaction sizes and volumes, have dominated this market for
decades. Technology (such as BizFOREX's unique, proprietary IFT Platform),
however, has lowered the barriers of entry and opened up this attractive marketplace
to a new breed of investors and speculators.
What is margin?
What is the bid?
What is the ask?
Bid -The price at which buyers offer to buy currencies from sellers.
Ask - The price at which sellers offer to sell currencies to buyers
What is a "pip"?
What does it mean
to be "long" or "short" a position?
If a trader goes long USD/JPY, he/she buys USD and sells Yen. Buying a currency
is synonymous with taking a long position in that currency. A trader takes a
long position in a currency if he/she believes it will appreciate in value.
If a trader shorts USD/JPY, he/she sells USD and buys Yen. Selling a currency
is synonymous with shorting that currency. A trader would short a currency if
he/she believes it will depreciate in value.
What is the difference
between market and limit orders?
Market orders are executed immediately at the current market price.
Limit orders are orders that a trade should be executed (in the future)
when the market price reaches a specified price trigger. A limit order places
restrictions on the maximum price to be paid or the minimum price to be received.
What is a price
forecast?
A price forecast is a quantitative prediction of the future price movement
of an instrument. Price forecasting uses historical data to analyze trends or
patterns and make a prediction on the direction of the market or a particular
currency in the future.
What is a "round
trip" transaction?
Speculative currency trading is designated "round trip" because the
positions will be closed (settled) within the same account and same account
currency from which the trades originated. IFT currently enables US Dollar
accounts and round trip transactions only. Thus, all cash deposited and cash
withdrawn will be in US Dollars (multi-currency accounts will be available in
the near future).
Where can I get
information on the "central banks"?
BizFOREX provides links to a variety of Central Bank Web sites accessible via
the Resources section of the IFT Web site.
Where can I get
"advice" on the currency markets?
BizFOREX does not provide consulting services or offer direct trading advice.
