You might be wondering and asking yourself…Is Trading Forex Really Worth It? and what, if any, the benefits might be.
If you are a casual investor, there is a good chance that you have heard the term “foreign exchange trading” or forex.
To give an incredibly simplistic overview, it is a stock market based on foreign currencies around the globe.
Here is a brief overview of just what works with forex trading and why there are so many investors that take a shot at the forex marketplace.
Liquidity is basically the ability to convert an asset into cash.
The more liquid something is, the quicker it can be exchanged for actual currency.
When it comes to the forex trading game, the highly liquid nature of it means that large amounts of money can be moved out of and into currencies with spreads that are generally small.
The spread is essentially the difference between the bid prices that potential buyers and the ask prices that potential sellers have.
A Five-Day, 24-Hour Market
Unlike the securities exchange market which closes at 4PM EST each weekday, the forex trading market is worldwide.
This means that as long as there is a market open somewhere in the world, the forex trading market remains open.
Trading will begin in the United States when the first major market opens. This occurs in Sydney, Australia at 5PM EST each Sunday.
The trading then ends for the week when the last major market closes.
This is in New York, closing at 5PM EST on Friday.
This means that there are more opportunities available on the forex trading market than there would be on the standard New York Stock Exchange.
Low Transaction Costs
Generally speaking, the cost of a transaction will be built into the price that is in the forex market. This is in the form of the spread.
Then, the forex brokers end up pocketing the spread as their payment for their role in facilitating the trade.
Spreads are measured in what are known as pips. In most currencies worldwide, a pip is the fourth place that comes after the decimal point or 1/100 of a percent.
The only difference here is that trades that involve the Japanese yen have the pip set as the second place after the decimal point, or one percent.
For example: in a forex trade, if the price of the bid was 1.3244 and the price of the ask was 1.3246, then the spread for this particular transaction would be 2 pips.
There is also a commission that the brokers may charge; this can be either a flat fee or a fee that is based on a percentage of the amount of the total transaction.
There Is Profit to Be Made from Falling and Rising Prices
One of the most important things about the forex market is that there are no restrictions when it comes to directional trading.
What this means is that if you think a currency pair will have an increase in value, you can then buy it (known as going long), and if you think that the pair will decrease in value, you can opt to sell it (known as going short).
Since currencies always trade in pairs, you are then always buying one currency while simultaneously selling the other. This does not matter if you are going short or long, that is the nature of the beast on the forex market.
For instance, you might be trading the US Dollar and the British pound (USD/GBP) as your currency pair.
You would buy the pair –in this instance, it would be buying the dollar and selling the pound – if you expect the value of the first currency, which his known as the base currency, to increase in overall value when compared with the second currency, known as the quote currency.
If you expected the value of the dollar to decrease in value when compared with the value of the pound, you would then sell that pair – selling the dollar and buying the pound.
Whereas the regular stock market you have to first borrow the shares to sell them short, selling a currency that you don’t own on the forex market is a pretty simple process where you just have to place a sell order.
You Can Use Leveraging in Your Picks
One major difference between the forex trading market and the stock exchange market is that you are allowed to buy and sell on the forex marketing using a significant amount of leverage.
This gives that customer the ability to trade at much higher amounts than they actually have in their accounts.
For example, if you were to execute a trade at a 50:1 leverage, you could trade $50 for every dollar that was in your account.
That means you only need to put up $1,000 of capital to control a trade of $50,000.
The key here is to be smart and pick your spots; being unprepared is a quick and easy way to find yourself in the doghouse.
The forex trading game takes some time and a lot of research to get involved in. Even if you feel like you know your stuff, only real-time experience will aid you as you make your picks. One of the most important things to remember as well is that you need to take the emotion out of it.
There are far too many traders in the forex market that don’t know when to cut their losses and only end up compounding them further.
Having the ability to cut losses at the right time is what separates the successes for the also-rans.
The forex trading market can be a thrill ride if you know what you are doing and there is certainly a lot of money to be made for those who know what they are doing.
When you study and find the trends that work, you can make serious money in the forex trading market.