The FOREX Market is one of the best kept “mysteries” in the world of investing, and until few years ago only the financial institutions, brokers and banks could participate in it.
This well kept “mystery” is the biggest financial market in the world; over 4.0 trillion dollars worth of transactions take place on the Forex Market every day! This amount exceeds by far all of the other combined equity markets in the world.
However, recent changes make this market accessible to a larger public and the individual investor. So, individuals can now trade the same market that the banks, industrial corporations and brokers have found so lucrative and kept to themselves.
Here below, please note the elements composing the Forex trading.
Benefits of Trading FOREX?
There are many benefits and advantages to trading the Forex market. Here below please note a few reasons justifying why so many investors prefer to trade in the FOREX market.
Open 24 Hours, 5 Days per Week?
The FOREX Market never stops. It is a 24 hour, 7 days a week market. Actually, a currency trader may exploit all profitable opportunities of this market, virtually, at any time. There is no waiting for the opening of an exchange as in the case of trading stocks, derivatives or other financial instrument. It is a 24-hour; continuous, currencies trading, that never stops. For those who want to trade on a part-time basis the Forex market is very suitable, because they can choose when they want to trade, morning, noon or night. Because of the world time zones you can actually effectively trade, 5 days per week. Even during the weekend major market makers are making transactions between each other.
Superior Market Liquidity?
With $4.0 trillion daily worth of transactions, the FOREX market is highly liquid. With a click of a mouse you can instantly buy and sell as you please. Whether it’s 8 o’clock in the morning or 10 o’clock in the evening, somewhere in the world there are always buyers and sellers actively trading in Forex. You are never blocked in a transaction. You can even use the online trading platform to open a new position or to close your position at your desired profit taking level, and/or close a trade if it is going against you (stop loss).
FOREX investors are permitted to trade foreign currencies on a highly leveraged basis – up to 500 times their investment. Leverage allows traders to make substantial profits and at the same time keep low the risk of the capital they may use.
Profit Potential in both Rising and Falling Markets?
In FOREX trading you can profit in both rising and falling markets. A trader can easily “short” a particular currency pair, as easily, go “long”, on another. Currencies are traded in “pairs”. Thus, when you buy a particular currency, you simultaneously sell the other currency in that particular pair. As the market changes, one of the currencies will increase in value versus the other. Of course, it is up to the trader to choose the correct currency to be long or short in a pair. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. In this way, a trader has equal opportunity to achieve profits in both, a rising or falling market.
Low Transaction Costs?
Active traders of other financial instruments like, stock and futures face substantial reduction of their gross profits going to commissions, exchange fees, and data/chart feeds. Usually, in FOREX there are no commission fees. In FOREX what you see is what you get. In the Forex market, costs are further reduced by the efficiencies created by a purely electronic marketplace that allows clients to deal directly with the dealer, that can be a physical person or automated trading systems which significantly increase the speed of operations. Because the Forex market offers round-the-clock liquidity, traders receive tight; competitive spreads both for intra-day and night trading. Unlikely, stock and derivatives traders, who can be more vulnerable to liquidity risk and typically, receive wider trading spreads, especially during afterhours trading.
The currencies pairs?
As mentioned earlier, Forex is traded in currency pairs. The currency pair consists of two currencies that make up an Exchange Rate usually known as “quote”. When, one currency is bought by a trader, the other is automatically sold, and vice versa. The Exchange Rate is the value of one currency expressed in terms of another. For example, if EUR/USD is 1.5000, 1 Euro is worth US$1.5000.
The Base Currency is the first currency in the pair. The Quote Currency is the second currency in the pair. You will always see the USD quoted first with few exceptions such as Pounds Sterling, Euro, Australia Dollar and New Zealand Dollar.
The majority of all currencies are traded against the US Dollar. The four next most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF). These four currencies traded against the US Dollar make up the majority of the market and are called major currencies.
- EUR/USD = “Euro”
- USD/JPY = “Dollar Yen”
- GBP/USD = “Cable” or “Sterling”
- USD/CHF = “Swissy”
- USD/CAD = “Dollar Canada” (CAD referred to as the “Loonie”)
- AUD/USD = “Aussie Dollar”
- NZD/USD = “Kiwi”