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Foreign Exchange Market (Forex)

Please read this disclaimer as it is very important that you understand risks associated with Forex trading.

The Foreign Exchange market, also referred to as the "Forex" or "FX" market is the largest financial market in the world, with a daily average turnover of well over US$1,5 trillion -- 50 times larger than the combined volume of all U.S. equity markets. This high volume is advantageous from a trading standpoint because transactions can be executed quickly and with low transaction costs (i.e., a small bid/ask spread).

In contrast to the world’s stock markets, Foreign Exchange is traded without the constraints of a central physical exchange.

Foreign Exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EURUSD. That is, sell Euros and buy US dollars.

 

24-Hour Trading

Forex is a true 24-hour market, which offers a major advantage over equities trading. Whether it's 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately, and P&L is not affected by after hours earning reports or analyst conference calls.

A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

 

Superior Liquidity

With a daily trading volume that is 50x larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price.

 

High leverage(*)

100:1 leverage(*) is commonly available from online FX dealers, which substantially exceeds the common 2:1 margin offered by equity brokers. At 100:1, traders post $1000 margin for a $100,000 position, or 1%.

While certainly not for everyone, the substantial leverage(*) available from online currency trading firms is a powerful, moneymaking tool. 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.

The most effective way to manage the risk associated with margined trading is to diligently follow a disciplined trading style that consistently utilizes stop and limit orders. Devise and adhere to a system where your controls kick in when emotion might otherwise take over.

 

Lower Transaction Costs

It is much more cost-efficient to trade Forex in terms of both commissions and transaction fees. Most brokers charges NO commissions or fees whatsoever, while still offering traders access to all relevant market information and trading tools. Commisions are in fact included in the bid/ask spread (the difference between buy and sell price). Regardless of deal size, forex dealing spreads are normally 5 pips or less.

 

Trading Potential In Both Rising And Falling Markets

In every open FX position, an investor is long in one currency and short 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 a falling market.

The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the equity markets, it is much more difficult to establish a short position due to entry precondition rules and associated costs


(*) Without proper risk management, this high degree of leverage can lead to large losses as well as gains.


'Without proper risk management, a high degree of leverage can lead to large losses as well as gains.'
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