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Why trade Forex?

Why trade any financial markets?

Before we look at what makes Forex such an attractive market to so many, let us briefly go over what Forex actually is.

Forex, also known as the foreign exchange market or the currency exchange market, is the 'place' where currencies are traded. The global need of governments, businesses and individuals to exchange currencies is the primary reason why Forex is the largest, most popular, and most liquid financial market in the world.

Even though some of the reasons why trade Forex are evident from these opening lines, let's start from scratch.

Why trade any financial markets?

Why should anybody trade financial markets at all? Perhaps the most prominent reason is to gain control over their own economic future without limitations to the wealth of their employer or of their national economy.

'A basic freedom that we have in virtue of living in a capitalistic country is that we are free to speculate on the movement of prices. This freedom does not require any additional justification, such as promoting the interests of commercials. All that is required is that the general public not be harmed and that the market place be organized according to fair rules and procedures.' - The Rosenthal Report circa 1976.

Advantages of trading Forex as opposed to other markets

Forex never sleeps

The Forex market is open 24/5. Why? Because governments, businesses and individuals who require currency exchanging services are spread around the world, so trading on the Forex market never stops. This is made possible because there is no single physical location restricted to set opening hours. Rather, since most money in the world is digital these days, so is currency exchange. Naturally, trading volumes per currency are skewed towards certain hours, but in no case is it limited. For example, currency pairs with Japanese yen are most traded when it is daytime in Japan. However, since there are always counter currencies to complement the pair, JPY ends up being traded all day (through 24 hours) with a spike in activity from 00.00 to 8.00 GMT. Similarly, so do the Australian dollar, the New Zealand dollar, the Singapore dollar, the Hong Kong dollar and other currencies of the countries native to the Asian-Pacific region, thus the name of the Asian-Pacific trading session.

Respectively, European currencies are most traded from 8.00 to 16.00 GMT - this is called the London/European session, and from 16.00 to 24.00 is the North-American trading session.

Activity on the Forex market basically follows the sun around the world. At any time of the day or night, you can find an active pair to trade.

A word of caution, though. Just because the Forex market never sleeps, doesn't mean you don't have to - a tired mind is no good for trading.

To sum up, the Forex market is open 24-hours a day, 5 and a half days a week and there is no trading over the weekend.

Why would anyone trade Forex as opposed to other markets? A good reason is because those with full time jobs are able to trade Forex after work, before work and on Sunday evening.

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Long or short

Forex goes both ways, which can be advantageous for traders.

Let's highlight a story about Mr. Charles Dow and how things were in his trading days.

It was the end of the 19th century. A niche news agency, founded by Mr. Dow, Mr. Jones and Mr. Bergeresser, housed a small team of analytical staff in an obscure Wall Street basement. In 1889 the agency printed the first edition of their financial newspaper called The Wall Street Journal. In 1896 the Dow Jones Index was launched.

Roughly speaking, the DOW Jones Index shows a weighted average of how the stocks of the 30 largest publicly owned US companies have traded during the last stock market session. It is often used by the media to indicate how well or not so well the economy of the US is doing. However in the times of Mr. Dow the index was less nominal and more indicative because of a simple particularity - investors could only trade profitably one way - buying. Investors only invested in assets that, in their opinion, would maintain value or increase it. Thus, companies whose stock traded for the better (went up), apparently, did better business-wise.

There was no way of making profit from selling assets that were depreciating. The only thing that selling stocks that dropped in value could achieve was to prevent more loss from further toppling.

Fast forward a century, to why Forex traders being able to sell, unlike in many other financial markets, and make a potential profit is the 'best thing ever'. Forex traders can make money whether markets are going up, down, or in circles. Regardless of the event that has triggered the movement - Forex traders do not care.

Low trading costs

A few things are worth mentioning under the low cost topic.

First of all, most Forex accounts trade with little or no commission and there are no exchange fees or data licenses. If there are fees, they are but 'mark up' from the dealer on the spread. If not, the cost of trading is the spread between the buy price and the sell price, which is always a function of market activity. So, if you think the USD/JPY spread is not tight enough for you, try trading the corn market.

Second of all, it only requires a low initial investment.

Want a no-deposit account? Browse the web for a half an hour and you are guaranteed to find one. The entry barriers are much lower in Forex than any other traditional financial markets, which is one of the key reasons behind how much and how quickly the market has grown. To give you a reference, the Securities and Exchange Commission requires you to keep a minimum of $25k in your account to day trade the stock market. Futures brokers require traders to post margins and maintain a minimum account size of thousands of dollars to gain access to, and be allowed to trade the market.

Lastly, the trading software, analysis tools and even the price quotes, none of which are actually free to a stock or futures trader, are all available for free to a Forex trader. All these necessary things have been paid for by your Forex broker, allowing you to trade what you want without restrictions.

The leverage

Leverage is another reason why you should trade Forex.

Few currency traders realise the miracle of financial leverage available to them simply because they have never traded any other market. If they had traded the stock market for example, the maximum leverage stock brokers offer is 1:2, while the maximum leverage some Forex brokers offer 1:1000. It's not hard to see that this is one of the reasons why Forex trading is so popular.

Such high leverage in Forex trading is of course another way of attracting traders unable to afford an investment of $25k, but it is only possible because of the liquidity available in the Forex market.

High leverage allows a trader with insignificant investments to trade high volumes of currencies and thus have the potential to make significant profits from the smallest moves in the market. This however, is also true for the possibility of making a significant loss. It is important to understand that in and of itself high leverage doesn't make trading any riskier. Rather, it is the high volume allowed by high leverage that does. In the hands of a careful and knowledgeable trader even the most leveraged account can be traded safely.

Liquidity

International exposure is the main reason to thank for the infamous liquidity in Forex. As the world becomes more and more global, investors hunt for opportunities anywhere they can. If you want to take a broad opinion and invest in another country (or sell it short), Forex is an easy way to gain exposure while avoiding vagaries such as foreign securities laws and financial statements in other languages.

To absolve you of mind blowing figures that mean nothing when taken out of context, let's just say there is more coming through the Forex market in a day than Japan makes in a year. With most trading concentrated in only a few currencies, for example roughly 80% of all Forex transactions involve the US dollar, there are always a lot of people trading. This makes it typically very easy to get into and out of trades at any time, even in large sizes.

There is just one small, but crucial remark on why Forex trading is tricky around liquidity. You will hear others talk about liquidity, the interbank market, and the sheer size of the Forex market as a non negotiable advantage. These factors, however, are relevant only for the institutional side of the business but have little meaning for the retail trader. It's important to keep in mind that retail traders are trading via Forex brokers. If the broker in question is a market maker your trades are kept on its books, because it is the only counterparty, and they never actually go into the true interbank marketplace.

Accessibility

Forex can be traded from anywhere where there is an internet connection - it doesn't even require broadband.

Accounts can be opened after filling out a simple form and undergoing a rudimentary identity check. They can be funded on the same day and traded instantly. Truly, anyone with the desire to trade can get started in the Forex market within 30 to 60 minutes.

Disadvantages of the Forex market

The disadvantages of trading Forex are not as numerous, but are very important to keep in mind as they can potentially overwhelm the advantages if discounted.

Regulation

Once again, the Forex market is a decentralised market place. This means that, aside from it not being location bound, it is also not subject to one unilateral regulation. This makes Forex trading for retail traders a tougher journey. The glimmer of hope for them on this journey is the local regulation of the country where the legal entity is registered. In the USA, the UK, the European Union, Japan, Australia, Cyprus and many other countries there is a government or a semi-government organisation, responsible for licensing financial brokers and keeping them in check.

Usually, if the broker has a license and adheres to the regulation it is matter of pride and a selling point at the same time. If this is the case all such information is available at the trader's first request. If, however, the broker is an offshore entity, unlicensed in the country where it conducts a portion of business, getting a straight answer from its representatives might prove difficult.

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The kicker

The biggest disadvantage of Forex market is that all of its benefits can be easily negated by an inexperienced trader, who can easily access the market, but wouldn't know right from wrong in it.

The Forex market is probably the least refined environment trader-wise exactly because it is so easy, so cheap and so promising to try. The currencies market ill-fame precedes it and one of the first things newcomers wonder is if Forex is a scam and if it is at all possible to make any money. It is possible, but how probable depends entirely on the individual trader.

Before deciding to trade on the foreign exchange market you should carefully consider your investment objectives, level of experience, and risk appetite. Educate yourself (check our Education section here), train yourself, invest your time and money, treat it with all seriousness and care, and Forex should pay out eventually.

All in all, why would anyone trade Forex? Because financial trading is definitely something worth trying and most definitely something worth succeeding at.