Frequently Asked Questions on Forex Trading and Forex Traders

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Are forex brokers regulated? ^^^
The Commodity Futures Trading Commission (CFTC) has the responsibility for overseeing and regulating the foreign exchange markets. If a foreign exchange brokerage company wants offer over-the-counter (OTC) foreign exchange trading to its customers, it must be registered as a Futures Commission Merchant (FCM) and be subject to strict capital requirements.
Can anyone trade foreign exchange? ^^^
Individuals are not able to acquire foreign currencies at quoted Forex rates on the Forex exchanges unless they are licensed Forex traders. Most people acquire foreign currency from a commercial bank which charges the individual a commission.
Do all currencies fluctuate? ^^^
Some currencies do not fluctuate. The central bank of the country has decided to set the foreign exchange rate of the country’s currency. Other currencies are partially floating currencies. In this case, the foreign currency rates are allowed to change within the limits set by the government.
How can an individual trade foreign exchange? ^^^
Just as with stocks and bonds, an individual would have to open a foreign exchange trading account with a broker in order to trade foreign exchange. They can be used for both speculative trading and commercial trading.
How do international banks use the Forex markets? ^^^
The interbank foreign exchange market handles the majority of commercial foreign exchange and also does large amounts of speculative trading every day. Some of this trading is for the account of customers, who use foreign exchange to buy and sell their products, but much is conducted by “proprietary” desks, trading for the bank's own account in order to make a profit or hedge positions in currencies they may hold.
How do you choose a forex broker? ^^^
Once you have decided you would like to speculate in the foreign exchange markets, it is important that you choose the right broker for you needs. You need to find someone with whom you can be comfortable, and who specializes in accounts of your size. Research on the internet and you will see that there are hundreds of forex brokers throughout the world for you to choose from. Finding the right one for you will take some work and research. You will see that some forex brokers concentrate on banks, institutions, investment funds and high net worth individuals, which would eliminate them working with a small investor. If you are new to this area of investment and speculation, you may want to choose a foreign exchange broker who offers courses that you can take, either on line or in person. Many brokers and dealers are accustomed to making rapid trades in this fast-paced environment, and would not be the ideal choice if you are trying to get your feet wet and understand the workings of this market.
How is money made on the forex markets? ^^^
People make money by trading on the changes in the foreign currency rates. They may buy one currency with dollars, hoping that the foreign exchange rates will move in their favor and then can sell that currency and get more dollars than they paid for it.
How much does a currency fluctuate? ^^^
Depending on the currency and the demand for it, it can move very little or a great deal. If a country experiences political or economic problems, the currency rates may change very frequently as buyers and sellers try to adjust to these changing conditions.
Is trading in forex simple? ^^^
Trading in forex is far from simple. The basic mechanism, giving one kind of currency in order to receive another is simple, but so many factors affect the rates that these currencies are exchanged at that it becomes very complicated to analyze these factors, and an entire industry has arisen just to do this.
What are foreign exchange brokerage firms? ^^^
Foreign exchange brokerage firms buy and sell different kinds of currency, either for their own account, or on behalf of customers. Forex brokers handle a very small part of the total volume of the foreign exchange market, about 2% of the whole market. Until recently, foreign exchange brokers did large amounts of business. Today, however, much of the foreign exchange business has moved on to more efficient electronic systems.
What are forex options? ^^^
A foreign exchange option is an instrument that gives the owner has the right but not the obligation to exchange a currency at a pre-agreed exchange rate on a specified date. The owner pays an option fee for that right.
What are the typical products offered by a forex broker? ^^^
In addition to foreign exchange transaction services, many forex brokers offer courses, business analysis and advice to their clients.
What if I don’t have the time to follow all of this information? ^^^
Since many forex investors do not have the time, experience or desire to follow these markets 24 hours a day, forex managed accounts are offered by many brokerage firms. Based on your long-term goals and risk tolerance your currency professional uses your trading outlook to actively manage your portfolio.
What is a forex swap? ^^^
A foreign exchange swap is two transactions of the same amount, with different value dates. In a foreign exchange swap, the customer and the broker convert a currency into another at an agreed exchange rate and make settlement of the funds on the one value date and, in accordance with another agreed rate convert those two currencies in opposite directions and make settlement of funds on the second value date. The most common foreign exchange swap is to combine a spot transaction with a forward transaction.
What is a forward currency sale or purchase? ^^^
A forward position means that you buy or sell the forex with a future settlement date, but at a rate that you fix today. This eliminates what is called the “foreign exchange risk” because you know today how much you have to pay for the currency at that future date.
What is commercial foreign exchange trading? ^^^
Many firms have a commercial need for foreign exchange; in other words, they need to pay for goods and services or receive payment for goods and services in currencies other than their own. Such a firm would use a forex broker, or his bank or some other financial institution to arrange for the purchase or sale of this foreign currency.
What is foreign exchange trading? ^^^
The term “foreign exchange” basically refers to buying the currency of one country while selling the currency of another country. All nations have their own, different kinds of money (currency). As trading developed between nations, the need to convert one kind of money to another also developed. This is how a formal system of foreign exchange arose.
What is involved in foreign exchange trading? ^^^
If you have decided you can absorb the risk of speculative foreign exchange trading, you will have to understand the movements of currencies against each other, the impact of interest rates on those movements, how political events and the actions of governments can affect foreign exchange rates, and many other factors.
What is meant by “hedge a position”? ^^^
A commercial customer of a forex broker may have a large purchase coming up in the future. Let us say a shoe store is buying a large shipment of shoes from Brazil for delivery in the fall. When the company enters into the contract in the spring, he doesn’t know how much he will have to pay for the shoes in the fall. When he signed the contract for the shoes, payable in Reals (the Brazilian currency) he created a “short” position in Reals because now he owes them to his seller. So he enters into a forex contract with the broker so that he buys the foreign currency now for delivery to his seller in the fall. In this way, he eliminates the risk that the Real will be much more expensive in the fall and wipe out any profit he makes on the shoes. He covers his “short position” by buying (creating a long position) in that currency. He has hedged his Real exposure.
What is speculative forex trading? ^^^
An individual may feel he can take advantages in movements of currencies between countries to make a profit. There are hundreds of internet trading sites that offer the opportunity to do this. You simply open an account and make a deposit to it to start trading. Profits from trades are credited to you account and losses are debited. Forex trading is very risky and should be entered into with care.
What is spot currency? ^^^
If you make a simple transaction to get some other country’s currency in exchange for yours, you are conducting a spot transaction. You do not request the currency to be delivered at a future date, but just handed to you right now in exchange for your currency. The best example of this is if you plan a trip to a foreign country and want to have that currency in your wallet when you get there. But large transactions can also be spot currency transactions whereby the purchaser or seller couldn’t plan the need or decided to take the risk on the fluctuation of the currency.
What is the advantage of trading in foreign exchange? ^^^
In addition to corporate customers who may find it necessary to purchase and sell forex for their commercial needs or to hedge their positions, individuals may find it desirable to spread their risks over a broad range of markets rather than rely only on stocks and bonds.
What is the role of central banks in Foreign Exchange? ^^^
National central banks play a critical role in the foreign exchange markets. Through the forex markets, they try to control the money supply, inflation, interest rates and target rates for their currencies. They frequently use their substantial foreign exchange reserves, to stabilize the market.
What organizations do most of the foreign exchange trading? ^^^
Large international banks, central banks, and other financial markets and institutions handle most of the foreign exchange trading.
What products do forex brokers offer? ^^^
Companies and individuals who speculate in foreign exchange or hedge their positions in foreign exchange do so through many means besides buying a currency that they will need. Products used to achieve these ends include spot and forward currency sales and purchases, options and swaps.
Why do currency rates change? ^^^
Most foreign currency rates change all the time and are called floating currencies. Their price is determined by market forces, primarily supply and demand. If there is a greater demand for dollars and more British Pounds are being sold, the United States dollar will increases in value.