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Forex FAQ

November 9, 2009

What is Forex?

The system of global trading in foreign currency is known as the Foreign Exchange Market, Forex, or just FX. Over the last three decades the foreign exchange market has become the world's largest financial market, it trades over $1.5 trillion USD daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Forex is part of the bank to bank currency market known as the 24-hour Interbank market.

Why Forex trading?

Forex trading is attractive because it offers unparalleled freedoms. A Forex trader can live almost anywhere as long as he/she is within reach of the internet. A Forex trader can work from home or office, and in some cases, even trade while traveling! A Forex trader can usually choose his/her own hours to work since the global foreign exchange market is open 24 hours a day. A Forex trader avoids many common headaches associated with running a business because there is NO inventory, NO shipping, NO billing, NO collections, NO employees, NO commuting and NO dress code. And finally, since Forex traders can potentially earn a very high income, they enjoy the possibility of never, ever working for someone else again!

How high are the risks in FOREX trading?

The risks can be high but also controllable. Forex traders around the world are competing against other forex traders, banks, and institutional traders who are seeking the same potential rewards from their own trading activities. Money management, discipline, talent, and a lack of emotion are traits you will want to develop in FOREX trading. But remember, FOREX Trading is speculative and any capital used should be risk capital. In fact, we recommend that you trade on a demo account until you have shown profit for at least three consecutive months before trading real money.

What are "long" or "short" positions?

A long position is one in which you buy a currency at one price, with the expectation of selling it later on at a higher price. Obviously, you anticipate that the market will rise. A short position is one in which you sell a currency with the expectation of buying it back at a lower price. Here, you expect the market to fall. Every FX position you take automatically entails going long in one currency, and short the other. If you buy one, by default you are shorting the other.

What is a Pip?

A pip is a term used in the currency market to represent the smallest incremental move an exchange rate can make. Depending on context normally one basis point is 0.0001, as is the case of EUR/USD, GBP/USD, USD/CHF. In example if the EUR/USD moves from 1.2561 to 1.2562 it is one pip.

How much a pip worth?

If you trade the full contract (100k of currency) the EUR/USD and GBP/USD are worth approximate $10. In other words if you have a trade with 50 pips in profit, it means the gain is $500. ($10 per pip x50 pips). If you trade a mini account is 1/10th of the size, 50 pips will worth $50.

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