The foreign exchange market or foreign exchange market as it is more commonly known used to be the exclusive domain of the large international banks and to some extent they still try to control and manipulate it. However, largely due to the internet and high-speed connections, the market has opened up significantly to smaller traders. The forex market is unique and offers a better opportunity to make money than most other forms of investment for five basic reasons:
1) World market
Currency trading takes place around the world and while it is influenced by internal events in the most financially important countries, the effects are often balanced between negative influences in one corner of the world and positive influences in other places. Currency trading is always between two currencies, or currency pairs as they are known, and individual currencies do not have an absolute value on their own. The value of a currency can only be measured in comparison to another currency and if one of them falls in value, the other will increase in value. This is unique because in other forms of investment, such as the stock market, a negative influence in one corner of the world can reverberate around the world, creating a drop in the value of shares around the world. The current economic crisis is a perfect example of this. The subprime loan market in the US collapsed and the effects were soon felt around the world with the biggest stock market crash since the 1930s.
2) Trading volume
Simply put, this is the amount of money that is traded at any given time and within the forex market the trading volume is immense. A survey conducted a couple of years ago put the amount of money traded in the forex market at $4 trillion per day. The US dollar is the most traded currency involved in 85% of all currency transactions, followed by the euro with 35%. The largest currency trading center is London, followed by New York and Tokyo.
3) Liquidity
The liquidity of an asset is the ease with which it can be converted into cash without loss of value or at least without significant loss of value. Currency is money and money is cash and therefore more liquid than any other asset, making it very easy to trade.
4) Leverage
Leverage in the financial world is all about controlling a large amount of money with a small amount of money. In the Forex market, we see the highest leverage ratios apply. Typically 50:1, 100:1 or even 200:1. At the low end, 50:1 or 100:1 is typically provided for a standard trade of 100,000 units of a given coin. For smaller transactions of $50,000 or less, 200:1 is the norm.
For example, an investor trading $100,000 will only need $1,000 in their trading account and an investor trading $50,000 will only need $250.
This level of leverage compares to 15:1 in the futures market and only 2:1 is common in the stock market. The reason for such high levels in the forex market is that the level of risk is relatively low, with currency price changes typically only 1% or less during a trading day.
5) 24 Hour Market
Because the forex market is global, forex trading can take place 24 hours a day, 5 days a week. The market effectively opens in Sydney, Australia at 22:00 UTC on Sunday night and closes on Friday evening in New York at 22:00 UTC.
