A number of factors such as the
size, volatility and global structure of the foreign exchange market have all
contributed to its rapid success. Given the high liquidity of the forex market,
investors are able to place extremely large trades without directly affecting
any given exchange rate. These large positions are made possible for forextraders because of the low margin requirements used by the majority of brokers.
It is possible for a trader to have a position of US$100,000 by putting down as
little as US$1,000 up front and borrowing the remainder from his or her forexbroker. This amount of leverage acts as a double-edged sword because investors
can realize large gains when exchange rates make a small favorable change, but
they can also incur huge losses when the rates move against them. Despite the
foreign exchange risks, the amount of leverage available in the forex market is
what makes it attractive for many speculators.
The currency market is also the
only market that is open 24 hours a day with a high degree of liquidity
throughout the day. For traders who may have a day job or just a busy schedule,
it's a great market to start trading in. As you can see from the chart below,
the major trading centers are spread throughout many different time zones,
eliminating the need to wait for an opening or closing bell. As the U.S.
trading closes, other markets in the east are opening, making it possible to
trade at any time during the day.
While the forex market may offer
more excitement to investors, the risks are also higher in comparison to
trading stocks. The ultra-high leverage of the forex market means that huge
gains can quickly turn to equally huge losses and can wipe out the majority of
your account in a matter of minutes. This is important for all new traders to
understand, because in the forex market - due to the large amount of money
involved and the number of players - traders react quickly to information
released into the market, leading to very quick moves in the price of thecurrency pair.
Although currencies don't tend to
move as sharply as stocks on a percentage basis (unlike a company's stock that
can lose a large portion of its value in a matter of minutes after a bad
announcement), it is the leverage in the spot market that creates the
volatility. For example, if you are using 100:1 leverage on $1,000 invested,
you basically control $100,000 in capital. If you put $100,000 into a currency
and that currency's price moves 1% against you, the value of the capital will
have decreased to $99,000 - a loss of $1,000, or all of your original
investment (that's a 100% loss!). In the stock market, most traders do not use
leverage, therefore, a 1% loss in the stock's value on a $1,000 investment
would only mean a loss of $10. That being said, it is important to take into
account the risks involved in the forex market before diving in head first.
In order to learn more about the
risks associated the Forex Market and how to overcome them, you should
associate yourself with a broker. If you don't know about any, you can try www.tradize.com
