Advantages of forex trading
- 24 hour market. It offers traders instant access to the markets at all hours of the day.
- At 5pm Sunday New York time , trading begins in Sydney Australia.
- The Tokyo markets open at 7pm New York time.
- Singapore and Hong Kong open at 9pm
- Followed by European markets in Frankfurt at 2am and then London at 3am.
- The US markets open first in New York at around 8am Monday.
- Lower transaction costs make Forex attractive to trade. In the equity market, traders must pay a spread and a commission with an online equity broker. The over the counter (OTC) structure of the Forex market eliminates exchange and clearing fees which in turn lowers transaction costs.
- Higher leverage. Most online currency firms offer 50 times leverage on regular-sized accounts and up to 200 times on miniature account. In a leveraged trade the trader will borrow funds from the broker for a small interest fee. The trader has to only deposit a small amount called the margin while the broker lends the rest of the money for the trade.
- Profits in both bull and bear markets: Forex always involves buying one currency and selling another. Therefore if you are long one currency then you are at the same time short another. This means there is an equal chance of making profits in both upward trending and downward trending markets.
The Forex market is decentralized and has many players. The participants are in a hierarchy. The Interbank market is at the top of the hierarchy. In this market the largest banks deal with each other directly or through electronic brokering systems like EBS or REUTERS. The highest volumes during the day occur in the Interbank market. Other institutions such such as online Forex brokers , hedge funds or corporations must trade Forex through the banks. Retail traders or the individual must trade through the online brokers who deal with the Interbank. Through this system average traders can now trade alongside the biggest banks in the world with virtually similar pricing and execution.
What moves the FX market
Currencies move primarily based on supply and demand. Various macro economic indicators affect supply and demand. The diagram below shows the most important indicators that move the market.
Interest Rates :
If a country raises its interest rates, the currency of that country will strengthen in relation to other countries as investors will move assets to the country to get a higher return.
Unemployment: Unemployment data like non-farm payroll data from the USA . This shows a measure of the health of the economy because if jobs are being created then the country is doing well and is being productive. If unemployment data is high then the economy is not doing well and the central bank will delay increasing the interest rates which makes the country a less attractive place for investors and reduces demand on the currency.
Trade Balance: Trade balance shows the net difference over a period of time between a nations exports and import. A trade balance is negative or in deficit when a country imports more than it exports. A trade balance is positive or in surplus when a country exports more than it imports. A trade deficit is generally not considered good and it decreases the demand for the currency as countries are not purchasing the currency in order to pay for the exports.
Conclusion This article provided a gentle introduction to what Forex trading is. It explored some of the advantages of Forex trading, the players that are involved in it and the major forces that move it. I wanted to show that it is not excessively complex to understand and has many advantages over stock market trading. I hope that the article has succeeded in sparking the excitement and curiosity to learn more.
Introduction to forex trading