Foreign Exchange Market: The Secrets of Its Success
The foreign exchange market has numerous aspects which make it unique. It has been described as the closest to pure competition that can be in existence, although the international banks try to control and manipulate it. Nonetheless what makes it so special, and why might you consider that you are gonna be able to generate money on the forex market compared to other types of investment trading such as stock trading?
Trading Volume
The amount of money traded on the foreign exchange market everyday is enormous. The average daily turnover around the world is nearly $4 trillion, according to a survey by the Bank For International Settlements (BIS) in December 2007. The largest trading center is London, followed by New York and Tokyo. However, the US dollar is the most traded currency.
Liquidity
The liquidity of a commodity is its ease of conversion to cash without affecting the value. Money is already money, so it is more liquid than any other asset. This implies it is very easy to trade.
A Global Market
Forex is not traded in one location but everywhere around the world. Which means that, although obviously it is affected by national events in the largest financial powers, the effects are balanced out. Currencies do not have definite value: a currency’s value can only be measured in comparison with another currency. Therefore if one currency falls in value, another will rise.
Compare this with the stock exchange where it is possible for the value of each company’s stock to fall simultaneously. All you can do in a major stock market crash is to withdraw your investment. But in forex trading, you are able to switch from the dropping currency to the rising currency and still generate profits.
A 24 Hour Market
Currencies can be traded all over the world 24 hours a day, 5 days a week. The foreign exchange market opens at 22.00 hours UTC Sunday in Sydney, Australia, where it is Monday morning, and closes at 22.00 hours UTC Friday in New York, where it is Friday afternoon. So whatever time of day or night you want to trade, you will have the chance, except if your only free time is on weekends.
Leverage
Leverage is where a tiny amount of something can be utilized to control a larger amount. In forex trading, leverage relates to the technique of trading on margin. You invest a small amount in your brokerage account and your broker lends you the rest, so that you don’t have to placed the entire value of your position.
Currency trading provides more leverage compared to stock or futures trading. You may be able to control up to 200 times your account balance, depending on the broker. Higher leverage offers you the possibility of greater profits, nonetheless, there is also the risk of bigger losses. You will not necessarily want to take the maximum leverage on the foreign exchange market, particularly in the beginning.
