Why Forex Trade?

24 Hour Market

FX is a global market that never sleeps. It is active 24-hours a day for almost 7-days a week. Most activity takes place between the time the New Zealand market opens on Monday, which is Sunday evening in Europe, until the US market closes on Friday evening. Psycho Box - It's not a requisite to spend time watching the market during 24 hours- it's even not advisable. The market never sleeps, but you should. With Forex, though, one could theoretically day trade in the evenings after work or in the mornings beforehand. This is very desirable, specially if you are starting out and want to trade on a part-time basis, because you can choose when you want to trade: morning, noon or night.

Superior Liquidity

The FX market is huge and it is still expanding. According to the authoritative Triennial Central Bank Survey from Bank for International Settlements in 2010, Basel, daily average volume now reaches US$ 4 trillion. Technology has made this market accessible to almost anyone and retail traders have flocked to FX. With such a tremendous daily trading volume, the Forex market can absorb trading sizes that dwarf the capacity of any other market. This means a lot of trading liquidity and flexibility specially at London time, New York and Tokyo (in this descending order). There are always participants willing to buy or sell currencies in the Forex market. Its liquidity, particularly in major currencies, helps ensure price stability and market efficiency. Traders can almost always open or close a position at a fair market price

Over-The-Counter Market

While it is true that there is exchange-based Forex trading in the form of futures, the opposite condition occurs in the OTC market via the spot market.

The Forex market is an 'over the counter market' (OTC), which means that there is no physical location and no central exchange and clearing hours where orders are matched. Instead, it operates 24-hours a day via an electronic network of banks, corporations and individuals trading one currency for another.

FX traders constantly negotiate prices between one another and the resulting market bid/ask prices are then fed into computers and displayed on official quote screens. Forex exchange rates quoted between banks are referred to as Inter-bank Rates.

At first glance, this ad-hoc arrangement can look like the wild west to investors who are used to organized exchanges. But be reassured, this arrangement works exceedingly well in practice: because participants in Forex must both compete and cooperate with each others, they provide very effective control over the market.

Leverage

Leverage trading means, in short, that you are permitted to trade many times the size of your margin deposit. This is primarily attributed to the higher levels of liquidity explained before.

For instance, a leverage of 1:100 means, in order to buy and benefit from one lot of 10,000 US dollars you only have to commit your 100 dollars, the rest of the amount is leveraged by the broker.

While certainly not for everyone, the substantial leverage available with most online retail brokers in the Forex market is an essential attribute of this market. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day.

Leverage is a both way weapon: on one hand it lets traders profit from a lot size much larger than their investments. But on the other hand, it exposes them to losses of equal magnitude. You can win or lose quicker - that's right - but that's not all: a too small leverage can be equally dangerous as you will learn in Exam Module A [link].

The most effective way to manage the risk associated with leveraged trading (also called margin trading) is to diligently implement risk management in your trading plan. You have to devise and adhere to a system where your controls kick in when emotion might otherwise take over.

Narrow Spreads

Spreads, the difference between the bid and offer price, in FX are miniscule. Just compare a 2-pip price in EUR/USD with a price in even the most active and liquid equity issue. Furthermore, FX prices are typically ‘good’ for far larger amounts than in equity. The spread is the hidden, ‘intrinsic’ cost of dealing and in FX it is minimal.

Because of the currency market round-the-clock liquidity, superior technology and the competition among market makers, you receive tight, competitive spreads both intra-day and night.

No Commission or Transaction Costs

The over-the-counter structure of the Forex market eliminates exchange and clearing fees, which in turn lowers transaction costs.

Alert Box - The question if it is more cost-efficient to trade Forex in terms of both commissions and transaction fees depends not only on your broker's conditions but also on your trading style. Forex is more efficient if you know how to balance the number of trades and the earnings ratios. The usual lack of commissions is another factor that, despite being an advantage, has to be well understood to make it work in your benefit.

Profit Potential Regardless of Market Direction

Conventional investing is based on the notion of one-sided ownership: you buy (go long), you sell (go short). Currency markets, in contrast, place equal value on buying and selling.

Every open Forex position has two sides because currencies are quoted in terms of their value against each other. This is because currencies are traded in "pairs" (for example, US dollar vs. Japanese yen or US dollar vs. Swiss franc), one side of every currency pair is constantly moving in relation to the other.

When a trader is short in one currency he/she is simultaneously long on the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as in a falling market.

Info Box - We will spend a lot more time instructing you in the mechanics -about pairs, pips, spreads and leverage- so don't worry if it sounds complicated here.

Equal Access to Market Information and Transparency

Despite the introduction of best execution regulations in Europe and the US, few would disagree that professional traders and analysts in the equity market have a huge competitive advantage in comparison to individual traders. In FX, perhaps the only advantage the big banks have is flow information. But FX is a democratic market where virtually all participants have access to the same market moving information as everyone else.

Given the multimillion dollar exchange that takes place every day in the currency markets, manipulation of the price is rather nonexistent compared to other less liquid markets. However combined actions may occur in which several of the major participants - like central banks - force the market in a certain direction. That being said, this is not a rule but rather an exception.

Forex is a High Risk Investment

Trading in the foreign exchange markets on margin carries a high level of risk, and may not be suitable for all individuals. The high degree of leverage offered in the Forex markets can work against you as well as for you. Before deciding to trade in the foreign exchange markets you should carefully consider your investment objectives, your level of experience, and your risk appetite.

The possibility exists that you could sustain a loss of some or all of your equity and therefore you should not invest money that you cannot afford to lose. Only true discretionary cash should be used in trading. You should make yourself aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any questions or concerns as to how a loss would affect your lifestyle.

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