What is Forex?
Many people ask the same questions – What is forex trading and when did it start? Well, in order to get the answer to those two things, you need to know a couple of things about this type of trading, so keep reading and you will find the answers you’ve been seeking below.
Forex represents the international market for the free trade of currencies. This is how it works – the traders are placing orders in order to buy one currency with another currency. Here is how it works – a trader may want to buy US dollars with Euros and in order to do this, he will use the help of forex market.
The forex market is actually the biggest financial market in the world. There are more than 5 trillion dollars traded on daily basis. Interesting fact is the overall amount of traded money in a week is greater than US’s GDP. You should also know that the main currency used for forex trading is US dollar.
When did forex start?
The forex market has lots of advantages but before we reveal some of them, it is important for every future broker to know how everything started. It all has begun right after the World War II due to the urgent need for financial stability. There was an international meeting on which it was presented a new economic system where the exchange rates would be fixed.
Thanks to this agreement the IMF (International Monetary Fund) was established. All changes occurring in exchange rates (above 1%) had to be approved by IMF which led to the effect of fixed exchange rates. As for the advantages of the forex trading, here are some of the major ones.
A Global 24-Hour Market
One of the biggest advantages of forex market that will most probably attract your attention at first is the fact that it can be accessed 24-hours a day. This is actually pretty convenient because you do not have to wait the market to open. Anytime, anywhere, there is a major financial center where hedge funds, corporations, banks and speculators are trading currencies. Basically the traders can trade during anytime of the night or day. This is one of the things that make people try forex trading, even if they have a regular job. However, keep in mind that when it comes to futures markets or stocks, you can trade less than 7 hours on a daily basis.
With the futures and stock market, a trader would need to have access to ECN (electronic communication networks) for pre-market trading, otherwise he will have to wait until the markets open. The volatility of the market is determined by any important news that has occurred while the markets were closed, so keep a close track on them.
World’s Most Liquid Market
As of 2004 the volume of daily trading on the forex market reached record high exceeding 1.9$ trillion. This is nearly 59% increase considering the trading volume back in 2003. Interesting fact worth of mentioning here is that this volume approximately 20 times greater than the combined volume trades of Nasdaq and NY Stock Exchange market. Nearly 80% of the forex transactions have dollar leg, so there is no room for worry about issues with liquidity while trading any of the economy-big currencies such as EUR, CHF, CAD, NZD, AUD, USD, GBP. However, keep in mind that when it comes to futures, commodities, options or stocks you will be restricted by their illiquidity, especially during the after-hours.
Don’t worry even if you are a beginner on the forex market, because most brokers out there guarantee fills on limit and stop-loss orders on up to a decent number of standard lots. Plus they provide instantaneous trade executions from real-time quotes which are being displayed on the screen. Usually there is no discrepancy between the displayed price and the execution price itself during normal conditions on the market. However, be careful while trading during news or during high volatility periods because those times are a bit tricky. In stock and future markets the execution price can be really vague because all the orders have to be done via the exchange and thus, slippage and partial fills are pretty common due to the chaotic open-outcry system.
Buy Or Short-Sell Anytime
In case you want to trade stocks, you need to know that short-selling is only allowed with an uptick. This is why it can be a bit frustrating for traders to wait and see the trend going downward, while waiting for the opposite movement. In the futures market there is a limit down or limit up rule which can be applied when the value of the contract increases or declines by more than certain, previously set percentage. On the other hand, on the forex market you can easily short a currency pair anytime you want without having to wait for any upticks.
Profit In All Market Conditions – bull, bear or sideways
Forex gives you the freedom to short or long currency pairs depending on the opportunities you are expecting. There are no exchange-enforced restrictions on daily activities, like for futures or stocks.
Another great advantage here is that the forex market offers the highest leverage available for any market worldwide. It allows traders to execute different trades up to 500 000$, having in their account initial margin of only 5000$. In such case, the leverage is as high as 100:1. Or if that’s not enough for you – there are even higher leverages, all you have to do is to check out the brokers you have chosen and see what the kind of leverage they are offering is. However, keep in mind that while you can increase your profits with higher leverages, you can bankrupt as fast as well. So keep in mind that high leverage is really tricky tool!