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The foreign exchange market has experienced explosive growth
over the last ten years. In that late 1990's, very few investors even knew
what the forex market was because the only players allowed in the market were
large hedge funds, investment banks, and very wealthy individuals.
However, that all changed in the 2000’s, as the advance of
technology and internet capabilities made it possible for the average investor
to open a small account at an online forex broker and begin buying and selling
The explosive growth in the fx market over the last ten
years has been due to good reasons” there are many substantial advantages to
trading in the fx market over other financial markets. In this article, we are
going to discuss 5 of these advantages.
24 Hour Market
The fx market opens on Sunday evening around 5 pm est and it runs 24 hours a
day until Friday afternoon around 5 pm est. This is a big advantage for traders
because it means that positions are not subject to unexpected overnight news
events. In the fx market, a trader can simply close a position in the middle of
the night if news comes out against his market position. There are no huge
overnight gaps since sessions never officially close.
Unparalleled Liquidity
With average daily turnover at roughly $4 trillion, traders have no problem
getting in and out of the market. In futures and equity markets, traders can
grow too big, but in the fx market, that is never a
problem.
Low Transaction Costs
In the fx market, most brokers do not
on your trades. Instead, a trader
simply pays the spread between the bid and ask on the currency pair he is buying
or selling (the broker gets paid by widening the spread). This means that a
traders cost of doing business is directly proportionate to his trade size,
which is very beneficial for the trader. Furthermore, spreads continue to
tighten as brokers fight to gain a larger market share of traders, and this
continues to drive down overall costs for the
trader.
Leverage
Leverage is a two-edged sword. In fact, leverage is arguable the number one
killer of losing forex accounts. However, it is still what draws so many traders
to the fx market. In the United States, traders can leverage up to 50:1, and
outside the U.S., traders can leverage up to 100:1 or more. Trading with
leverage is very dangerous and can lead to quick profits, but it can also lead
to very quick and large losses.
Fewer Instruments
In equity markets, traders have thousands of stocks to choose
from. In the fx market, however, there are literally only a handful of major
currency pairs. A trader can focus on just two or three major currency pairs
such as the and EUR USD. This makes market analysis much less
cumbersome and time consuming. There is enough movement on these pairs every day
for traders to find trade opportunities. Every three years the Bank of International Settlements does
in-depth market research concerning foreign exchange transactions. In the spring
of 2010, the BIS released its latest figures, and it stated that average daily
volume in the fx market is now at $4 trillion. Furthermore, it estimated that
this figure could double over the next 10 years. That means that average daily
volume could be pushing $8 trillion by the year 2020. The fx market is not only
the largest financial market in the world today, it is also the fastest growing,
and it has the biggest growth potential. For these reasons, it is a favorite
among many investors. |
