Forex basics

Frequently Asked Questions

What is the "Off Exchange Retail Foreign Currency Market," commonly referred to as the Forex?

The off-exchange retail foreign currency market, also referred to as the "Forex" or "FX" market, is the largest financial and investment market in the world. Forex is the simultaneous buying of one currency and selling of another. The world's currencies are on a floating exchange rate and are always traded in pairs, for example Euro/Dollar or Dollar/Yen. Forex investors use various methods of analysis (both technical and fundamental) in an effort to predict future price movement and thus profit from well timed transactions.

FX Trading is not centralized on an exchange; rather it is a true network of global banks, FCMs (Futures Commissions Merchants, or brokers) and private traders like you. As is the case with the stock and futures markets, the FX market is considered an Over the Counter (OTC) market. Transactions are conducted between two counterparts over the telephone or via an electronic network.

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.

How much should I invest?

That is what you should decide for yourself. Trading currencies is a very risky form of investing. Any funds used when speculating on the values of currency prices should be considered as risk capital.

Before deciding on the amount of investment you should carefully consider your objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.

Many FX brokers do not make minimum deposit requirements. Accounts may be funded by wire transfer, credit card, money order, check, or some "e-currency". Different brokers may have various conditions, some will charge for a transfer, sometimes it could be only bank fees. It is important to find a broker with convenient for your circumstances means of in/out payments.

Typically the standard minimum transaction size in the FX market is 1 lot, or 100,000 of the base currency, with a minimum margin deposit of 1%. For example, a US $100,000 position would require an initial margin deposit of US $1,000. Some brokers also offer the option of trading "micro lots", lot sizes that can be as small as 0.01 or 1% of either a standard or mini lot. Having in mind that the leverage may be as high as 1:500, it is possible to start with investments as small as several hundreds USD.

How do Forex brokers make their profit?

Most Forex brokers do not charge any commission from clients, but make profit on the spread – the difference between the Bid and Ask prizes. There are some exceptions, for instance some Forex brokers would open "Islamic" accounts in compliance of the Islamic Shariah Law, where the daily swap is replaced by fee per standard lot. As the amount of profit from every customer's trade is meagre, it is obvious (in the ideal world), that the broker should be interested in continuous trades carried out by the client, which is possible only if the client is successful.

What happens if I want to stop investing in my account? Can I get my money back or are there fees to get my money back?

With most Forex brokers you can withdraw your money from the account at any time. Usually there is no fee in this occasion, though depending on the method of withdrawal there could be a banking fee for the transaction. What is said here is true for the majority of regulated brokers. Please check "Terms and conditions" with your broker carefully, before transferring funds.

How much are the spreads?

Forex prices, or quotes, include a "Bid" and "Ask" similar to other financial products. Bid is the price at which a trader is able to sell a currency pair. The Bid price or sell price of a currency pair is always the lower price in a quote. Ask, sometimes referred to as "Offer", is then the price at which traders are able to buy a currency pair. In other words, Forex traders always buy at the high and sell at the low of a price quote. The difference between the Bid and Ask is called the "Spread" or "Pip Spread", which is the Trader's cost per trade or per transaction. There are typically not additional broker commissions involved in trading the Forex market, as there might be when trading other investment markets. Spreads offered by many Forex brokers could be as small as 1.8 pips for EUR/USD and usually higher for more "exotic" or cross-currencies.

In the most cases the spreads are specified for normal market conditions. Spreads could be not fixed and would fluctuate with news or other high/low volume conditions.

Who holds my money?

The Forex brokers that are regulated by some national or international Financial Authority are required to work within strict accounting and risk management frameworks under regular scrutiny. All capital not being used for margin purposes will be fully segregated into a special client account which is kept separate from the broker company funds in a reliable bank. Your funds would not be used to pay back creditors in the event of broker's company bankruptcy. What is said here is true for the majority of regulated brokers. Please check "Terms and conditions" with your broker carefully, before transferring funds.

Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.