If you feel that the value of one currency will increase against another in future, you may exchange the second currency for the first one so that when things happen as you expect, you can make the opposite deal by exchanging the first currency for that second one and gain profit from the deal. Dealers perform transactions on the Foreign Exchange market at major Forex brokerage companies or banks.
Forex is an integral part of the world market and is active 24 hours a day. Even when you are sleeping at midnight, transactions in Foreign Exchange occur in different parts of the globe. Clients may place orders with their brokers to sell or buy equities overnight.
In the past, small speculators were unable to enter into the Foreign Exchange market because of the stringent financial requirements and large minimum transaction sizes. The principal dealers in this field were banks, large speculators, big currency dealers, etc. Only they could take advantage of the strong trending nature of currency exchange rates and the currency market‘s unmatched liquidity. Today, small traders have the opportunity to buy or sell any number of smaller units because Foreign Exchange brokers are now able to break down the larger sized inter-bank units and offer them to buy or sell. It is at the option of smaller companies and individual speculators to trade at the same rates and price movements as large speculators and currency dealers who once reigned the market.
Being successful in Foreign Exchange trade is daunting and arduous especially if you are new to the field. I hope this blog will guide you to accomplish your goal.
Why is Forex Market Unique?
Forex markets have some unique features that provide an incomparable potential for profitable currency trading in any market situation. A trader need not wait for the 'opening hell' in the case of the exchange and has the opportunity to avail all fruitful market conditions at any time. Since the Foreign Exchange market is the most liquid market in the universe, traders can enter or exit the field at their will in any market condition.
Compared to the equity markets, Forex markets offer a high leverage ratio. Although high leverage offers high profits, it may also expose the trader to extreme losses. Under normal market conditions, the bid/ask spread is less than 0.1% (10 pips). In the case of larger dealers, the spread could be smaller and may expand a lot in fast-moving markets.
A bear market or a bull market for a particular currency is defined in terms of the positive or negative outlook of its future value against other currencies. If the outlook is positive, there exists a bull market for that currency where a trader would like to buy the said currency against other currencies. On the other hand, if the outlook is negative, there is a bull market for the other currencies against the said currency where a trader will be forced to sell that currency against other currencies. This way, the Foreign Exchange market is always a bull market and for traders, there is always a bull market trading chance.
Telephones and electronic networks help the global network of Forex traders to communicate and engage in trade with their clients. No organized exchange is there to facilitate transactions in the Foreign Exchange market unlike in the case of equity markets. It’s not possible for a single trader or even a central bank to control the market price for so long because the Forex market is so huge with numerous participants. When interventions are made even by mighty central banks, results turn out to be ineffective and short-lived. For this reason, central banks are becoming little interested in interfering to manipulate market prices.
The Foreign Exchange market is known to be an unregulated market although banking laws regulate the activities of major dealers like commercial banks in money centers. No law specific to the Forex market controls the retail Forex brokerages in their daily operations and many such institutions in the United States do not even give reports to the Internal Revenue Service.
Advantages of Trading Forex over Futures or Stock
By putting up a little amount of margin, a Forex trader can control a big amount of the currency similar to stock speculation and futures. The margin requirements for Forex are about 1% whereas the margin requirements for trading futures are around 5% of the entire value of the holding or 50% of the total value of the stocks. For every $100,000, the margin needed to trade Foreign Exchange is $1000. Therefore, a currency trader's money can play with 50 times more than a Stock trader or five times as much value of the product as a futures trader. For creating an investment strategy, this can be a very profitable way while trading on margin, but it is important to note that taking the time to understand the risks involved is always helpful. You should be fully aware of the way your margin account will work. Thoroughly read your margin agreement with your clearing firm before proceeding any further. If you have any doubt, talk to your account representative.
Paying exchange and brokerage fees is necessary when you trade in futures. The advantage of Forex is that you can trade commission-free. Letting buyers be matched with sellers instantly is a specialty of currency trading which is a worldwide interbank market. Although you need not pay commission to a broker to match the buyer up with the seller, the spread is higher than it is when you are trading futures.
Compared to trading futures, there is limited risk involved in Forex trading. After the discovery of Mad Cow Disease found in US cattle, the price of live cattle fell dramatically which moved the limit down for several days. This price fall could have wiped out the entire equity in your account. As the price continued to fall, you would have been compelled to find more money to compensate for the deficit in your account. Before the expiry of futures contracts, you have to think ahead whether to rollover your trades. Since Forex positions expire every two days, you have to roll over each trade so that you can stay in your position.
Trading in futures is limited to a few hours every day a market is open. Every time a major news story comes out when the markets are closed, you have no option but to wait until the market reopens. Forex market, on the other hand, is a 24-hour market. You can trade any time you prefer, Monday thru Friday. With an average daily turnover of around $6.6 trillion, Foreign Exchange is the largest market in the world, i.e. 46 times as large as all the futures markets collectively. It’s very difficult even for Governments to control the price of their own currency with the high number of people doing Foreign Exchange trade.
Forex trading is an excellent alternative to trading futures and commodities. To get started successfully in trading currencies, you require some help unless you are a Forex broker. The whole process should be much easier if you carefully follow the directions given.
0 Comments