Category: 3. Advance Tutorials

There are many advantages of trading forex over trading in other market instruments such as equity and derivative. The benefits of trading forex has the following benefits −

Low cost

If we consider trading forex market spot, normally there is no clearing fees, no exchange fees, no government taxes, no brokerage fees and no commissions. Generally, retail brokers make their profits from the Bid/Ask Spread, which is apparently very transparent to users.

No middlemen

In spot forex trading, there are no middlemen. It allows you to trade directly with the market accountable for the pricing of the currency pair (EUR/INR).

No fixed lot size

In the spot forex market, there is no fixed lot size for trading, though there is a fixed lot size which you need to trade, if you are trading in forex future or option market. This is one of the big advantages of forex trading. Generally, brokers provide the option to buy in multiple lot sizes as per your client requirement or convenience. Lot sizes differ broker to broker – standard lot, mini lot, micro lot or even nano lots. This enables you to start trading from as low as $50.

Low transaction costs

The retail transaction cost (bid/ask spread) is usually as low as 0.1% and for bigger dealers, this could be as low as 0.07%.

No one can corner the market

The foreign exchange market is large and has many participants, and no single participant (not even a central bank) can control the market price for a prolonged time period. Therefore, the chances of sudden extreme volatility is very rare.

24-hours open market

We do not have to wait for the opening bell to ring to start trading in forex. The forex market starts, from the Monday morning opening of the Sydney session to the afternoon close session of New York session. This allows us to trade anytime we prefers without giving much attention on what time it is.

Use of Leverage and Margin

This is one of the factors, which drags more and more traders towards forex trading. Forex brokers permit traders to trade the market by using leverage and with low margin, which gives the ability to trade with more money than what is available in your account. This allows traders with less amount to trade with much higher value of trade. For example, a forex broker may allow you the margin of 50 to 100 times your invested money. Therefore, if you have $100 in your account, you can take position from $5000 to $10000 that in turn can provide you bigger returns if the trade is in your favor. Inversely, always be cautious while taking very-high leverage without risk management; especially if you are a beginner, as this may wipe-out your entire amount within a couple of minutes.

Very High Liquidity

Because the size of forex market is huge, it is extremely liquid in nature. This allows you to buy or sell currency any time you want under normal market conditions. There is always someone who is willing to accept the other side of your trade.

The foreign exchange market is a global online network where traders and investors buy and sell currencies. It has no physical location and operates 24 hours a day for 5-1/2 days a week.

Foreign exchange markets are one of the most important financial markets in the world. Their role is of utmost importance in the system of international payments. In order to play their role efficiently, it is necessary that their operations/dealings be trustworthy. Trustworthy is concerned with contractual obligations being honored. For example, if two parties have entered into forward contract of a currency pair (means one is purchasing and the other is selling), both of them should be willing to honor their side of contract as the case may be.

Following are the major foreign exchange markets −

• Spot Markets
• Forward Markets
• Future Markets
• Option Markets
• Swaps Markets

Swaps, Future and Options are called the derivative because they derive their value from the underlying exchange rates.

Spot Market

These are the quickest transactions involving currency in the foreign exchange market. This market provides immediate payment to the buyers and sellers as per the current exchange rate. The spot market account for almost one-third of all currency exchange, and trades usually take one or two days to settle transactions. This allows the traders open to the volatility of the currency market, which can raise or lower the price, between the agreement and the trade.

There is an increase in volume of spot transactions in the foreign exchange market. These transactions are primarily in forms of buying and selling of currency notes, cash-in of traveler’s cheque and transfers through banking systems. The last category accounts for almost 90 percent of all spot transactions are carried out exclusively for banks.

As per the Bank of International Settlements (BIS) estimate, the daily volume of spot transaction is about 50 percent of all transactions in foreign exchange markets. London is the hub of foreign exchange market. It generates the highest volume and is diverse with the currencies traded.

Major Participants on the Spot Exchange Market

Let us now learn about the major participants on the spot exchange market.

Commercial banks

These banks are the major players in the market. Commercial and investment banks are the main players of the foreign exchange market; they not only trade on their own behalf but also for their customers. A major chunk of the trade comes by trading in currencies indulged by the bank to gain from exchange movements. Interbank transaction is done in case the transaction volume is huge. For small volume intermediation of foreign exchange, a broker may be sought.

Central banks

Central banks like RBI in India (RBI) intervene in the market to reduce currency fluctuations of the country currency (like INR, in India) and to ensure an exchange rate compatible with the requirements of the national economy. For example, if rupee shows signs of depreciation, RBI (central bank) may release (sell) a certain amount of foreign currency (like dollar). This increased supply of foreign currency will halt the depreciation of rupee. The reverse operation may be done to halt rupee from appreciating too much.

Dealers, brokers, arbitrageurs and speculators

Dealers are involved in buying low and selling high. The operations of these dealers are focused towards wholesale and a majority of their transactions are interbank in nature. At times, the dealers may have to deal with corporates and central banks. They have low transaction costs as well as very thin spread. Wholesale transactions account for 90 percent of the overall value of the foreign exchange deals.

Forward Market

In forward contract, two parties (two companies, individual or government nodal agencies) agree to do a trade at some future date, at a stated price and quantity. No security deposit is required as no money changes hands when the deal is signed.

Why is forward contracting useful?

Forward contracting is very valuable in hedging and speculation. The classic scenario of hedging application through forward contract is that of a wheat farmer forward; selling his harvest at a known fixed price in order to eliminate price risk. Similarly, a bread factory want to buy bread forward in order to assist production planning without the risk of price fluctuations. There are speculators, who based on their knowledge or information forecast an increase in price. They then go long (buy) on the forward market instead of the cash market. Now this speculator would go long on the forward market, wait for the price to rise and then sell it at higher prices; thereby, making a profit.

Disadvantages of forward markets

The forward markets come with a few disadvantages. The disadvantages are described below in brief −

• Lack of centralization of trading
• Illiquid (because only two parties are involved)
• Counterparty risk (risk of default is always there)

In the first two issues, the basic problem is that there is a lot of flexibility and generality. The forward market is like two persons dealing with a real estate contract (two parties involved – the buyer and the seller) against each other. Now the contract terms of the deal is as per the convenience of the two persons involved in the deal, but the contracts may be non-tradeable if more participants are involved. Counterparty risk is always involved in forward market; when one of the two parties of the transaction chooses to declare bankruptcy, the other suffers.

Another common problem in forward market is – the larger the time period over which the forward contract is open, the larger are the potential price movements, and hence the larger is the counter-party risk involved.

Even in case of trade in forward markets, trade have standardized contracts, and hence avoid the problem of illiquidity but the counterparty risk always remains.

Future Markets

The future markets help with solutions to a number of problems encountered in forward markets. Future markets work on similar lines as the forward markets in terms of basic philosophy. However, contracts are standardized and trading is centralized (on a stock exchange like NSE, BSE, KOSPI). There is no counterparty risk involved as exchanges have clearing corporation, which becomes counterparty to both sides of each transaction and guarantees the trade. Future market is highly liquid as compared to forward markets as unlimited persons can enter into the same trade (like, buy FEB NIFTY Future).

Option Market

Before we learn about the option market, we need to understand what an Option is.

What is an option?

An option is a contract, which gives the buyer of the options the right but not the obligation to buy or sell the underlying at a future fixed date (and time) and at a fixed price. A call option gives the right to buy and a put option gives the right to sell. As currencies are traded in pair, one currency is bought and another sold.

For example, an option to buy US Dollar ($) for Indian Rupees (INR, base currency) is a USD call and an INR put. The symbol for this will be USDINR or USD/INR. Conversely, an option to sell USD for INR is a USD put and an INR call. The symbol for this trade will be like INRUSD or INR/USD.

Currency Options

Currency options is a part of the currency derivatives, which emerged as an important and interesting new asset class for investors. Currency option provides an opportunity to take call on Exchange Rate and fulfil both investment and hedging objectives.

Factors affecting the currency option prices

The following table shows the factors affecting the currency option prices −

In this chapter, we will learn about the different types of market analysis. There are three types of analysis used for the market movements forecasting −

• Fundamental Analysis: This is the analysis of social, economic and political factors that affect currency supply and demand.
• Technical Analysis: This is the study of price and volume movement.
• Sentiment Analysis: Apart from mini and micro analysis of data, this is the analysis of the mindsets and sentiments of traders and investors.

Fundamental Analysis and Technical Analysis (FA and TA) go hand-in-hand in guiding the forex trader through the way the market (prices) may go under the ever changing market conditions.

Fundamental Analysis

Fundamental analysis is analyzing the currency price forming, basic economical and other factors influencing the exchange rate of foreign currency.

It is the analysis of economic and political information with the hope of predicting future currency price movements.

Fundamental analysis helps in forecasting future prices of various foreign currencies. Forecasting of prices is based on a number of key economic factors and indicators that determine the strength of a country’s economy. The factors may also include various geopolitical aspects that may impact the price movement of a currency pair.

This analysis is not used to get the specific numbers for the exchange rates of various currencies. Instead, it helps in determining the trend of the forex spot market over a certain period.

If the fundamental analysis hints at a positive outlook for a particular currency pair, it indicates that the price of that pair would experience an upward trajectory movement in the near future. A negative outlook indicates a declining price movement of currency pair in coming future. A neutral instance on currency pair indicates a flat (not much +ve or – ve side movement) movement in the near future.

When to use fundamental analysis for the forex market?

Whenever a forex trader receives information about the state of a country, he conducts a fundamental analysis to gauge the impact of this on various currency pairs.

Forex traders and investors always look into reports (fundamental analysis reports) based on critical economic data before trading (particular currency pair) on forex market. These reports (FA) also enable them to minimize the risk factors involved in executing forex transactions.

The Fundamental Analysis report for any market (equity, commodity, FX etc.) helps in decision-making over medium to long term exchange rate prediction (in case of FX market). On the other hand, Technical Analysis provides information for short-term predictions.

The market’s momentum can easily reverse or an extreme volatility can be seen in a matter of minutes after an important announcement or press release is made by the central bank. Information related to the status of the local and global economies can have huge impact on the direction in which the forex market trends.

Key factors influencing fundamental analysis

Let us now learn about the key factors that influence fundamental analysis. The factors are described below in brief −

Interest Rates

The interest rates set by the central bank is one of the most important factors in deciding the price movement of currency pairs. A high interest rate increases the attractiveness of a country’s currency and also attracts forex investors towards buying.

GDP Growth

A high GDP growth rate signifies an increase in the total wealth of the country. This points towards the strengthening of the country’s currency and its value rises relative to other foreign currencies.

Industrial Production

A high industrial growth in any country signifies a robust country economy. A country with robust economy encourages forex traders to invest in country forex currency.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) is directly proportional to the prices of goods and services in the country. If the CPI index is too high (above the central bank benchmark of CPI), there is a high probability that central bank is most likely to lower interest rates to bring down the rate of inflation and stabilize the growth rate for the country’s economy.

Retail Sales

A country’s retail sales data gives an accurate picture of how people are spending (people income level) and the health of its economy at the lowest level. A strong retail sales figure shows that the domestic economy of a country is in strong shape; it points towards positive growth rates in the future.

Apart from these above points, the traders and investors also look into other factors of fundamental analysis like employment statistics, national debt levels, supply and demand balance, monetary policy, political situation, trade deficit, commodity prices, housing prices and capital market growth.

Technical Analysis

Technical analysis helps in the prediction of future market movements (that is, changing in currencies prices, volumes and open interests) based on the information obtained from the past.

There are different kinds of charts that help as tools for technical analysis. These charts represent the price movements of currencies over a certain period preceding exchange deals, as well as technical indicators. The technical indicators are obtained through mathematical processing of averaged and other characteristics of price movements.

Technical Analysis (TA) is based on the concept that a person can look at historical price movements (for example currency) and determine the current trading conditions and potential price movement.

Dow Theory for Technical Analysis

The fundamental principles of technical analysis are based on the Dow Theory with the following main assumptions −

Price discounts everything

Price is a comprehensive reflection of all the market forces. At any point of time, all market information and forces are reflected in the currency price (“The Market knows everything”).

Prices usually move in the direction of the trend

Price movements are usually trend followers. There is a very common saying among traders – “Trend is your friend”.

Trends are classified as −

• Up trends (Bullish pattern)
• Down trends (Bearish pattern)
• Flat trends (sideways pattern)

Price movements are historically repetitive. This results in similar behavior of patterns on the charts.

Sentimental Analysis

The participants in every market, the traders and the investors have their own opinion of why the market is acting the way it does and whether to trade in the direction of market (towards market trends) or go against it (taking contrary bet).

The traders and investors come with their own thoughts and opinions on the market. These thoughts and opinions depend on the position of the traders and investors. This further helps in the overall sentiment of the market regardless of what information is out there.

Because the retail traders are very small participants in the overall forex market, so no matter how strongly you feel about a certain trade (belief), you cannot move the forex markets in your favour.

Even if you (retail trader) truly believe that the Dollar is going to go up, but everyone else (big players) is bearish on it, there is nothing much you can do about it (unless you are one of the big investment banks like – Goldman Sachs or some ultra-rich individual like Warren Buffet).

It is the trader’s view on how he is feeling about the market, whether it is bullish or bearish. Depending on this, a trader further decides how to play the perception of market sentiment into trading strategy.

What type of analysis is better?

Forex trading is all about trading based on a strategy. Forex trading strategies help you gain an insight of the market movements and make moves accordingly. We have already studied that there are three types of analysis methods.

• Technical analysis
• Fundamental analysis
• Sentiment analysis

Each strategy holds equal importance and neither can be singled out. Many traders and investors prefer the use of a single analysis method to evaluate long-term investments or to gain short-term profit. A combination of fundamental, technical and sentimental analysis is the most beneficial. Each analysis technique requires the support of another to give us sufficient data on the Forex market.

These three strategies go hand-in-hand to help you come up with good forex trade ideas. All the historical price action (for technical analysis) and economic figures (for fundamental analysis) are there – all you have to do is put on your thinking cap (for sentimental analysis) and put those analytical skills to the test.

In order to become a professional forex trader, you will need to know how to effectively use these three types of forex market analysis methods.

The forex currencies of a country are influenced by a series of macro-economic conditions as well as the world’s economic situation. Macro indicators like Economic indicators (GDP growth, imports/exports), social factors (the unemployment rate, country infra-structure or real estate market conditions) and the country central bank’s (like RBI in india) policies are the key factors that determine the value of a currency on the foreign exchange market.

Major Currencies

In this section, we will learn about the distinct features of six major currencies.

The US Dollar

The US Dollar dominates the world foreign exchange market heavily. The US Dollar is the base or universal currency to evaluate any other currency traded on forex. Almost all currencies are generally quoted in US dollar terms.

The US dollar currently represents about 86% of all foreign exchange market transactions. Most commodities (metals, oil etc.) are traded with prices denominated in US Dollars; as a result, any fluctuations in supply and demand of these commodities have direct impact on the value of US Dollar. This happened in 2008 financial crisis when oil prices collapsed and the EUR/USD climbed to 1.60.

As US dollar is considered as the safe-haven currency. Therefore, investors move towards the dollar when economic conditions deteriorate.

The Euro (EUR)

The Euro is the second most dominating currency in the forex market. Like the US Dollar, the Euro also has a strong international acceptance streaming from the members of the European Monetary Union.

The Euro is used by 18 member countries of the European Union and is currently accounted for almost 37% of all forex transactions.

The main factors that influence the acceptance of Euro’s prices are often based on wellestablished economies (developed countries) that use the common currency, such as France and Germany. Euro prices depend on key countries (like Germany) Consumer Price Inflation (CPI), the European Central Bank, unemployment rate, and exports data.

The Euro is the common currency of all the European countries and there is a difference between these countries’ economies, as was highlighted during the 2011 debt crisis. This restricts the dominance of Euro in the global forex market. In the event of problems, EU leaders have a hard time finding common solutions that are beneficial to both the large and small economies.

The Japanese Yen (JPY)

The Japanese yen is the most traded and dominating currency in the Asian forex market. It is the third most popular or traded currency in the forex market and represents almost 20% of the world’s exchange. The natural demand to trade the Yen comes mostly from the Japanese Keiretsu, the economic and financial conglomerates. The Japanese stock market, .i.e., the Nikkei index and real estate market correlate with the volatility of the Japanese yen (JPY).

Because the Japanese economy is mostly an industrial exports economy, the Japanese currency (JPY) among traders and investors is considered as a safe-haven currency in periods when risk aversion hits the market. Low interest rates in Japan allows traders to borrow at low cost and invest in other countries.

The JPY’s currency risks are related to the constant devaluation of the currency and the interventions of the country’s central bank. Because japan is an export oriented economy, the central bank is constantly trying to weaken its currency.

The British Pound (GBP)

The British Pound is the UK’s currency. Until the end of World War II, the pound continued to have the same dominance in forex market what is US dollar today and was the currency of reference. The currency (GBP) is heavily traded against the euro and the US dollar but has less presence against other currencies.

The British Pound (GBP) is the fourth most traded currency internationally and about 17% of all transaction is done through GBP in global forex market. Because London is considered as the forex market hub globally, 34% of all forex transaction pass through London City.

The fundamental factors that affect the pound are as complex and varied as the British economy and its influence on the world. Inflation, country GDP and the housing market influence the pound value.

Forex traders sometimes use the pound as an alternative to the euro especially when the European Union’s problems become too bad.

The Swiss Franc (CHF)

The Swiss Franc is the currency and legal tender of Switzerland. The currency code for Franc is CHF and the most popular Switzerland franc exchange rate is the CHF/EUR pair. It is also, the only currency of a major European country that neither belongs to the European Union nor to the G-7 countries. Though the size of the Swiss economy is relatively small, the Swiss franc is one of the four major currencies traded in the forex market, closely resembling the strength and quality of the Swiss economy and finance.

The CHF is also considered as the safe-haven currency and investors move towards it during periods of risk aversion: the Swiss economy and its foreign reserves mainly gold (7^th largest reserve in the world) add to the currency’s credibility.

The CHF prices depend on the central bank policy. The CHF tends to be more volatile compared to other major currencies due to lack of liquidity.

The Canadian Dollar (CAD)

The CAD is a commodity driven currency. This is because the Canadian economy is exportoriented and the main product of export is crude oil. Therefore, the Canadian Dollar prices are influenced by the price of crude oil.

Global economic growth and technological progress help to make the CAD attractive to investors.

Different Trade systems on Forex

There are different ways in which trading is done in the global forex market. The commonly followed trading systems in the forex market are described below −

Trading with brokers

The foreign exchange broker or the forex broker also known as the currency-trading broker unlike the equity or commodity brokers does not hold positions. The main role of these brokers is to serve banks. They act as intermediaries to buy and sell currencies at commissioned rates.

Before the dawn of Internet, a majority of the FX brokers executed orders via phone using an open box system. There was a microphone in the broker desk that continuously transmitted all that he communicated on the direct phone lines to the speaker’s boxes in the banks. This way, banks also received all the business orders.

In an open box system used by brokers, a trader is able to hear all the prices quoted; whether the bid was executed or the offer (ask) taken; and the price that followed. What is hidden from the trader is the amounts of particular bids and offers and the names of the banks showing the prices. The prices were confidential, and the buyers and sellers were anonymous.

In this age of Internet, many brokers have allowed clients to access their accounts and trade through electronic platform (mostly through their proprietary software) and computer applications.

Direct Dealing

Direct dealing is based on the economy of mutuality. All participants in the currency market – a bank, establishing a price, thinks that the other bank that has turned to it will reply with mutuality, establishing its own price, when they turn to the bank. Direct dealing provides freedom of actions than the dealing of the broker market. Sometimes traders take advantage of this characteristic.

Direct dealing previously took place over the phone. This gave way to mistakes which could not be identified and rectified. The mid-1980s witnessed a transition from direct dealing to dealing systems.

Dealing systems are computers that link the contributing banks around the world. Each computer is connected with a terminal. To connect to a bank through dealing system is much faster than connecting through a phone. The dealing systems are getting more secure by each day. The performance of dealing system is characterized by its speed, safety and reliability. The trader is in permanent visual contact with the information changing on its terminal/monitor. It is more comfortable with this information rather than to be heard during the switches, during the conversations.

Many banks use a combination of brokers and direct dealing systems. Both these methods can be used by the same bank but not in the same market.

Matching Systems

Matching systems are quite different when compared with dealing systems. Matching systems are anonymous and individual traders deal against the rest of the market, similar to dealing in the broker’s market but unlike dealing systems where trading is not anonymous and is conducted on a one-to-one basis. Unlike the broker’s market, there are no individual to bring the prices to the market, and liquidity is limited at times.

The different characteristics of matching systems are – speed, safety and reliability like the dealing system we have. One advantage in matching system is that credit lines are automatically managed by the systems.

In the interbank market, traders deal directly with dealing systems, matching systems and brokers in a complementary fashion.

 in which we are able to take position of $100,000 with an initial deposit amount of $1000.

This $1000 deposit amount is called “margin” you had to give in order to initiate a trade and use leverage.

Your broker to maintain your position uses it. The broker collects margin money from each of its client (customer) and uses this “super margin deposit” to be able to place trades within the interbank network.

Margin is expressed as a percentage of the full amount of the position. Your margin may vary from 10% to .25% margin. Based on the margin required by your broker, you can calculate the maximum leverage you can yield with your trading account.

For example, if your broker required 5% margin, you have the leverage of 20:1 and if your margin is 0.25%, you can have leverage of 400:1.

Hedging

Hedging is basically a strategy which is intended to reduce possible risks in case prices movement against your trade. We can think of it with something like “insurance policy” which protects us from particular risk (consider your trade here).

To protect against a loss from a price fluctuation in future, you usually open an offsetting position in a related security. Traders and investors usually use hedging when they are not sure which way the market will be heading. Ideally, hedging reduces risks to almost zero, and you end up paying only the broker’s fee.

A trader can utilize hedging in the following two ways −

To open a position in an off-setting instrument

The offsetting instrument is a related security to your initial position. This allows you to offset some of the potential risks of your position while not depriving you of your profit potential completely. One of the classic example would be to go long say an airline company and simultaneously going long on crude oil. As these two sector are inversely related, a rise in crude oil prices will likely cause your airline long position to suffer some losses but your crude oil long helps offset part or all of that loss. If the oil prices remain steady, you may profit from the airline long while breaking even on your oil position. If the prices of oil goes down, the oil long will give you losses but the airline stock will probably rise and mitigate some or all your losses. So hedging helps to eliminate not all but some of your risks while trading.

To buy and/or sell derivative (future/forward/option) of some sort in order to reduce your portfolio’s risk as well as reward exposure, as opposed to liquidating some of your current positions. This strategy may come handy where you do not want to directly trade with your portfolio for a while due to some market risks or uncertainties, but you rather not liquidate part or all of it for other reasons. In this type of hedging, the hedge is straightforward and can be calculated precisely.

Stop Losses

A stop-loss is an order placed in your trading terminal to sell a security when it reaches a specific price. The primary goal of a stop loss is to mitigate an investor’s loss on a position in a security (Equity, FX, etc.). It is commonly used with a long position but can be applied and is equally profitable for a short position. It comes very handy when you are not able to watch the position.

Stop-losses in Forex is very important for many reasons. One of the main reason that stands out is no one can predict the future of the forex market every time correctly. The future prices are unknown to the market and every trade entered is a risk.

Forex traders can set stops at one fixed price with an expectation of allocating the stoploss and wait until the trade hits the stop or limit price.

Stop-loss not only helps you in reducing your loss (in case trade goes against your bet) but also helps in protecting your profit (in case trade goes with the trend). For example, the current USD/INR rate is 66.25 and there is an announcement by the US federal chairperson on whether there will be a rate hike or not. You expect there will be a lot of volatility and USD will rise. Therefore, you buy the future of USD/INR at 66.25. Announcement comes and USD starts falling and suppose you have put the stop-loss at 66.05 and USD falls to 65.5; thus, avoiding you from further loss (stop-loss hit at 66.05). Inversely in case USD starts climbing after the announcement, and USD/INR hit 67.25. To protect your profit you can set stop-loss at 67.05(assume). If your stop-loss hit at 67.05(assume), you make profit else, you can increase your stop-loss and make more profit until your stop-losses hit.

Forex Market is an exciting place. The one good thing about entering into the forex market is that you can trade anytime as per your convenience.

The global Foreign exchange market (‘FX’, ‘Forex’ or ‘FOREX’) is the largest market in the world as measured by the daily turnover with more than US$5 trillion a day eclipsing the combined turnover of the world’s stock and bond markets. The forex market measuring a propelling turnover is one of the many reasons why so many private investors and individual traders have entered the market. The investors have discovered several advantages many of which are not available in the other markets.

What is Forex?

Forex (in simple terms, currency) is also called the foreign exchange, FX or currency trading. It is a decentralized global market where all the world’s currencies trade with each other. It is the largest liquid market in the world.

The liquidity (more buyers and sellers) and competitive pricing (the spread is very small between bid and ask price) available in this marked are great. With the irregularity in the performance in other markets, the growth of forex trading, investing and management is in upward trajectory.

Why Trade Forex?

So, why trade Forex? There are many reasons to trade in Forex. If we ask four different people, you might get more than four different answers. Primarily, making money is the most frequently cited reason for why trade Forex.

Let us now consider the following reasons why so many people are choosing forex market −

Forex market never sleeps

The Forex market works 24 hours and 5-1/2 days a week. Because governments, corporates and private individual who require currency exchange services are spread around the world, so trading on the forex market never stops. Activity on the forex market follows the sun around the world, so right from the Monday morning opening in Australia to the afternoon close in New York. At any point of the day you can find an active pair to trade.

Long or Short

A trader in forex can trade both ways. It means a forex trader can play the market and make profits irrespective of whether market is going up, down or is in tight range. So irrespective of the event that has triggered the movement – forex traders do not care.

Low transaction cost

Most forex accounts trade with little or no commission and there is no exchange or data license fees. Generally, the retail transaction fee (the bid/ask spread) is typically less than 0.1% under normal market conditions. With larger dealers (where volumes are huge), the spread could be as low as 0.05%. Leverage plays a crucial role here.

Leverage

Leverage is the mechanism by which a trader can take position much larger than the initial investment. Leverage is one more reason why you should trade in forex. Few currency traders realize the advantage of financial leverage available to them. For example, if you are trading in equity market, the maximum leverage a stock broker is offered is 1:2 but in case of forex market, you will get a leverage up to 1:50 and in many parts of the world even higher leverage is available. For this reason, it is not hard to see that why forex trading is so popular.

High leverage allows a trader with small investment to trade higher volumes of currencies and thus provide the opportunity to make significant profits from the small movement in the market. However, if the market is against your assumption you might lose significant amount too. Therefore, like any other market, it is a two-way sword.

High Liquidity

The size of forex market is enormous and liquid by nature. High liquidity means a trader can trade with any type of currency. Timing is not a constraint as well; trading can be done as per your convenience. The buyers and sellers across the world accept different types of currencies. In addition, forex market is active 24 hours a day and is closed only on the weekends.

Accessibility

Getting started as a currency trader would not cost a ton of money especially when compared to trading stocks, option or future market. We have online forex brokers offering “mini” or “micro” trading accounts that let you open a trading account with a minimum account deposit of $25. This allows an average individual with very less trading capital to open a forex trading account.

Who Trades Forex?

The forex market is enormous in size and is the largest market with millions of participants. Hundreds of thousands of individuals (like us), money exchangers, to banks, to hedge fund managers everybody participates in the forex market.

When can you trade forex?

Forex market is open 24 hours a day and 5 days a week. However, it does not mean it is always active. Let us check what a 24-hour day in the forex world looks like.

The forex market is divided into four major trading sessions: the Sydney session, the Tokyo session, the London session and the New York session.

Forex Market Hours

The following table shows the opening and closing time of each session.

Summer Session (Around April – October)

TIME ZONE	EDT	GMT
Sydney open	6:00 PM	10:00 PM
Sydney close	3:00 AM	07:00 AM
Tokyo Open	7:00 PM	11:00 PM
Tokyo Close	4:00 AM	08:00 AM
London Open	03:00 AM	07:00 AM
London Close	12:00 PM	04:00 PM
New York Open	08:00 AM	12:00 PM
New York Close	05:00 PM	09:00 PM

Winter (Around October – April)

TIME ZONE	EST	GMT
Sydney Open	04:00 PM	09:00 PM
Sydney Close	01:00 AM	06:00 AM
Tokyo Open	06:00 PM	11:00 PM
Tokyo Close	03:00 AM	08:00 AM
London Open	03:00 AM	08:00 AM
London Close	12:00 PM	05:00 PM
New York Open	08:00 AM	01:00 PM
New York Close	05:00 PM	10:00 PM

Note − The actual opening and closing timing of forex market depends on local business hours

We can see in the above chart that in between different forex trading session(region wise), there is a period of time where two sessions (region time) are open at the same time.

There is always more volume of trade when two markets (in different regions) are open at the same time.