What is Forex Trading?
The Foreign Exchange – World’s Largest Market
Depending on your level of experience with trading, you may not be aware that the largest traded market on the planet is not the U.S. Stock Market, it is the Foreign Exchange, also known as the Forex or 4X Market. The Forex experiences an average of about $4 Trillion in volume DAILY. To compare, the Nasdaq Market realizes a volume of under $150 on average with a high of about $148 Billion in recent days.
What Causes the Movement?
Currency is involved in almost all purchases or exchanges making the Forex, and the Currency Market a conglomerate of all markets from the U.S. Stock Market down to your local grocery store. Canada (#1 trade partner with the U.S.) exported about $360 Million in maple syrup last year. Maple syrup is only produced in North America due to weather conditions necessary to grow maple trees. Around 90% of all maple syrup is produced in Quebec, and Canada. Your local grocery store may be buying Canadian Dollars to purchase syrup to then resell it in USD (United States Dollars).
Every purchase involves money. If you are buying something as simple as lunch, a new TV, purse, or even shares in a company then currency is likely involved. That throwback basketball jersey you bought on Amazon.com produced in China? You bet. When you pay the company posting the product on Amazon.com in USD, they buy Chinese Yuan to then pay for the jersey in China.
Forex market moves are not caused by imports and exports alone, spending and growth in each economy causes movement as well. If the U.S. economy grows, then one might expect a bullish move for the U.S. Dollar. Governments may adjust spending, change the money supply, raise or lower taxes (affecting spending power), alter trade agreements (with tariffs for example), or simply create political risk (see Brexit).
Forex is based on a relative movement which can be difficult for many traders to understand. Imagine the U.S. economy grows, but at a slower rate than the Eurozone, you might then expect a fall in the USD versus the Euro. However, if the U.S. lowers their trade deficit with Europe over the same period, then there may be a very small change in exchange rate. Fundamentals can get confusing given the number of people involved in the Forex and the many angles to consider, but that can be overcome.
Unmatched Volume and Why It Is Good for Traders
Most traders use technical analysis. Cliché as it may sound, everyone in the market is looking for opportunities to buy low, and sell high.
Technical analysis is basically looking at past pricing behavior to predict future prices. The more times a price has been paid, the higher the chances it will get paid again. Consequently, traders pay attention to things like Support, Resistance, and Pivot Points.
Forex has a higher volume than any other market, so technical analysis can be more reliable in Forex than in any other market. If you are using historical data to predict future performance, higher volume yields more data to support your prediction.
Unmatched Liquidity – Get In and Out When You Want
Have you ever wanted to get out of a trade and not been able to? When investing in something like a stock, the number of buyers diminishes as the price goes up. If something is known to be “going in the tank”, there may not be any buyers. Many traders get to a price that they would love to sell their stock at, however they must wait until the price falls again to get out of the trade often forfeiting much of their profits. Sometimes they simply can’t get out of something because everyone is getting out and no one in their right mind would buy (see Enron).
There is constant demand for currency. Entering a Forex trade most often occurs in a fraction of a second, exiting the trade is often possible in a similar amount of time. Waiting longer than a couple seconds to get out of a position should be a rarity if you have a decent broker. For this reason, Forex can be ideal for day traders.
Forex traders are not subject to a settlement period like they are with stocks. When you close a trade in Forex, those funds are immediately available to open a new position or withdraw funds. In most cases, gains from a running trade can be used to open new positions without ever closing the original trade. Get in when you want, get out when you want. Use your gains to compound immediately, as well as take out your money when you need it.
Forex Trends Very Well
Many believe that that Forex is “too volatile” for long-term trading. They are mistaken, and likely overleveraging their positions. Below is a picture of long-term trend for the EURUSD.
Notice above that there has been a change in long-term trend less than once per year since 2008. One could also argue that the Euro is on a retracement from a slow downtrend for that whole period. It all depends on what you consider long-term. Still think this is a day trading and scalping market only? The beauty of Forex is that you can trade it however you like with a scalping, swing, or position strategy. Like all financial markets, the trouble most traders face is finding a strategy that works best for them.
Leveraging is essentially credit that gives greater purchasing power than an individual has in equity. Leveraging with Forex is very unique. Brokers do not “open a line of credit” in most cases; what this means is that if you are working with a reputable broker, you will likely never experience a margin call. In other words, you won’t lose more money than you deposit in your account.
Forex traders gain access to more leverage than is attainable in any other market. Average leverage for the world is 100:1 and some brokers give access to up to 1000:1; this means that your market power can be up to 1000 times the size of your investment in some cases. You can have incredible market power at a bargain.
The Forex is the world’s largest traded market and is growing in popularity for many reasons. Volume and liquidity are the highest of any market, allowing for quick entry and exit. Technical analysis can be much more applicable. Leveraging in Forex is unparalleled and provides an opportunity to make considerably higher than average returns. It is a skilled trader’s paradise.
On top of that, the market is open 24 hours per day, 5.5 days per week. Traders can open and close positions any time during that time span. If you have a job, you can trade after work… before…or during work if you are able to. Can’t sleep? Trade at 3AM if you want to. Flexibility is a key feature for many.
Forex provides more opportunity to trade with greater market power than any other market. Traders can scalp, swing, or position trades and avoid many of the drawbacks involved in trading other markets such as margin calls, settlement periods, and capital requirements. This market literally has it all!
Remember, with more market power comes more responsibility. Trade responsibly my friends!
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