Frequent Questions About Trading Forex - How to Choose a Forex Trading System

The off-exchange retail foreign currency market ("forex") describes the purchase of a particular currency from an individual or institution and the simultaneous sale of another currency at the equivalent value or current exchange rate. The process of exchanging one currency for another is a simple trade based on the current rates of the two currencies involved.

Depending on the timing of such transactions, purchasing a currency with the intent of later selling it at a better exchange rate (and vice versa) can potentially yield profits. Of course, there is a strong potential for loss as well.

The Forex market is the world's largest financial market and has recently become a favorite of the average investor who today... more than ever... is attempting to find additional income using internet trading platforms.

Retail traders like you will likely be accessing the off-exchange foreign currency market (or Forex market) via an FCM (Futures Commissions Merchant) or broker. You will not be trading in the actual Interbank market itself. Your access to the total market will be determined by your chosen broker's limitations.

FCMs or brokers act as a bridge between you and their liquidity partner (sometimes larger global banks) that you would otherwise not have sufficient capital to do business with.

The large majority of off-exchange retail foreign currency brokers act as market makers. This means that by keeping many trades in house they create their own liquidity. Some retail brokers clear trades directly through to the larger banks that provide their liquidity.

If you are new to the Forex market it would wise to research and understand your broker's particular business model and method of clearing trades. Quality forex education is critical before plunging ahead indiscriminately.

The Forex market operates 24 hours a day, 5½ days a week (6:00pm EST on Sunday until 4:00pm EST on Friday). Through an electronic network of banks, corporations and individual traders exchange currencies primarily as a means to speculate. Hours of operation are:

Forex 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 the price at which traders are able to buy a currency pair. Therefore, 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.

When you read a forex quote the first currency listed is the base currency and the value is always 1.

Forex markets and prices are mainly influenced by international trade and investment flows. Also, they can be influenced by the same factors that influence the equity and bond markets; that is, economic and political conditions, interest rates, inflation and political stability... or lack thereof.

Keep in mind that trading in the off-exchange foreign currency market is one of the riskiest forms of trading and you should only invest a small portion of your risk capital in this market.

Leverage is the key to understanding both the risk and reward associated with trading the Forex market. Many Forex brokers offer leverage as high as 200:1, meaning that $50 of margin would control a $10,000 position in the market (this is an example of a mini lot).

To some extent, higher leverage is a necessary evil in Forex trading. It can offer advantages over equities trading, but only if it is properly understood and utilized. Though currency values on a global stage are constantly in a state of flux, high liquidity and market stability translate to relatively small daily price movements

Without high leverage most retail investors would not be able to afford trading in the Forex market. However, with increased buying power comes increased risk. Traders who are new to the market often make the mistake of over-trading their account.

Because relatively small margin is required to open large positions freshman traders often make the mistake of opening too many positions at one time. A quick market move can result in substantial losses.

It is a computer program based on a set of forex trading signals that helps determine whether to buy or sell a currency pair at any one time. Forex robots are designed to remove the psychological element of trading, which can be detrimental.

Automated forex day trading robots are available for traders to purchase over the internet. It is important to note that there is no such thing as the "holy grail" of trading systems, whether automated or not.

If the automated system being sold was a perfect money maker, the seller would not want to share it. This is why big financial firms keep their "black box" trading programs under lock and key.

There are so many variables in the Forex market that even complicated robots can’t be expected to make the right decisions all the time without guidance from a human who knows the market.

But this doesn’t mean that some FX robots aren’t good tools. Some of them can make trading on the Forex market a lot easier. For example, an inexperienced trader may find that using a robot gives a much greater chance of success than if they were to start trading on their own.

Robots do need to be monitored and set up correctly to ensure that they make the right decisions as much as possible.

If Forex robots are used to aid in decision making, they can be very powerful. But you will be in for a severe and costly shock if you believe they will automatically start making you money.

All the major traders including banks use tools that are similar to commercial Forex robots (although more advanced versions) to make money and predict the market.

Even though Forex robots can be used to help Forex trading, a new trader should always do extensive research before buying any tool.

As with any exaggerated marketing claims, many robots being sold online are nothing but scams. However this does not discount the fact that some robotic software is legitimate and works well.

Whichever forex trading tool you decide to use, it is important to remember that it is how you use the Forex robot that determines whether it is a good investment. Expecting a robot to start making you money at the click of a button is unrealistic and will probably only end in disappointment.

There is an abundance of education on the internet as well as in book stores. Our suggestion is to find a proven forex training course that fits your personality. In other words, do you respond better to visual or audio training? Are you somewhat analytical or do you simply want someone to show you what to do?

The main thing is to be patient... not necessarily an easy task for some. We can almost guarantee that you will fail in your trading efforts if you don't force yourself to learn as much as possible about how currency pairs operate and how your broker handles both your money and your trades.

This is an order with restrictions on the maximum price you will pay... or the minimum price you're willing to receive.

For example, if the current price of USD/YEN is 117.00/117.05, then a limit order to buy USD would be at a price something like 116.50.

A stop loss order is when an open position is automatically liquidated at a specific price. It is frequently used to minimize exposure to losses if the market moves against your position.

For example, you go long USD at 156.27 you might wish to put in a stop loss order for 155.49. This would limit your loss should the dollar depreciate... for instance below 155.49.

Position orders are directly related to individual positions. These orders are only active while the position remains open... and it can be a stop loss or limit order.

Margin is collateral for a position. It allows you to trade leveraged positions using only a fraction of the equity necessary to fund the trade. In Forex the leverage ranges from 1% to 2%, giving you the high leverage needed to trade actively.

With a long position you buy a currency at one price and aim to sell it later at a higher price. This allows you to benefit from a rising market.

A short position is one in which you sell a currency in anticipation that it will depreciate. In this example you would benefit from a declining market. Keep in mind that every FX position requires an investor to go long in one currency and short in the other.

Currency prices are affected by a variety of economic and political conditions. These include interest rates... inflation,,, and political stability.

Also, governments typically participate in the Forex market to influence the value of their own currencies. They do this by flooding the market with their domestic currency in an attempt to lower the price. Or, they become buyers in order to raise the price.

This is known as Central Bank intervention. Any of these factors... as well as large market orders... can cause high volatility in currency prices. However, the size and volume of the Forex market makes it impossible for any one entity to totally control the direction of the market for any length of time.

The most common risk management tools in FX trading are the limit order and the stop loss order.

A limit order places restriction on the maximum price to be paid or the minimum price to be received. A stop loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses should the market move against your position.

The liquidity of the Forex market ensures that limit order and stop loss orders can be easily executed.

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