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Benefits of Forex Trading

The Forex (Foreign Exchange) Market is the largest market in the world. It is the market where currencies are traded. Each day, more than 4 trillion dollars are exchanged

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Market Liquidity and Volatility

  • The forex market is the largest and most liquid of the financial markets.
  • Daily activity often exceeds $4 trillion USD a day, with over $1.5 trillion of that conducted in the form of spot trading.
  • Forex spot trades consist of a contract to trade a given amount of a currency pair derivative with a market-maker, at the advertised buy / sell price (the spot rate).
  • It is the existence of volatility within the forex market that enables trader’s to take advantage of exchange rate fluctuations for speculative purposes.
  • Traders must be aware that greater volatility also means greater risk potential.

Liquidity – Refers to the number of buyers and sellers in the market willing to trade at any given time. Generally speaking, the greater the liquidity within a market, the greater the number of tradescompleted, which translates into higher

volumes.

Volatility – A measure of how much the price of a currency changes over time.

Market Hours and Liquidity

  • Forex trading operates 24 hours a day, five days a week. The greatest liquidity occurs when operational hours in multiple time zones overlap.
  • It is important to understand the correlation between liquidity and market activity.

Low Cost of Forex Trading

  • The cost to trade with most forex brokers is the spread. This is the difference between the bid and the ask price.
  • Spreads in the forex market also tend to be much less (ortighter) than the spreads applied to other securities such as stocks. This makes OTC forex trading one ofthe most
    • cost-effective means of investment trading.

    Advantages of Margin-Based Trading

  • Most OTC forex brokers offer margin-based trading accounts.
  • Margin-based accounts differ from credit-based accounts in that when trading in a margin account, you must first open an account with your broker, and then fund the account by depositing money into the account.
  • Once you have funded a margin account with your broker, you can engage in any trading activity you wish so long as you have sufficient margin remaining in your account.
  • Leverage makes it possible for you to trade larger positions than would otherwise be possible based on your actual account balance.
  • This means that leverage can provide greater potential for returns.
  • The downside of course is that there is also greater potential to lose money and you can incur significant losses in your account very quickly.
  • Potential Profit Regardless of Market Direction

    • A short-sale – or simply a short – is the selling of a currency pair derivative before you buy it.
    • It is very easy to enter into a short-sale when trading in the forex market.
    • In order to make a profit on a short, you must buy the currency derivative back for less than you received when you sold it. The difference represents your profit or loss.
    • The ability to engage in short-selling means that it is possible for you to profit no matter which way the market is trending.
    • When rates are increasing, you can earn a profit if you buy (go long) a currency pair derivative, and then sell it later for more than you paid.
    • When rates are falling, you can earn a profit if you sell (go short) a currency pair derivative, and then buy it later for less than you earned when you originally shorted the currency pair derivative.
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