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Home Frequently Asked Questions Currency Trading

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?

Margin is the cash amount that you deposit into your account; that an investor is required to keep on deposit to cover potential losses. If the margin requirement is 2% (as it is with IFT) and a trader wishes to buy $1 million USD/JPY, he/she must have $20 thousand US Dollars in value in his/her account (2% of $1 million or 0.02 x 1,000,000 = 20,000).

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"?

The smallest price movement available in an instrument. For example, USD/JPY 118.48/58 shows a 10 pip spread, and EUR/USD at 0.9517/27 also shows a 10 pip spread.

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.