HOW IT WORKS
The Forex market is open 24 hours 5 days a week. Trading starts when major global financial centers around the world open. The market opens in New Zealand on Sunday evening and ends after the market closes in New York on Friday. The greatest liquidity occurs when multiple time zones overlap.
The main advantage of Forex is that is open around the clock 24 hours as day 5 days a week, enabling traders to buy and sell from Sunday night to Friday night and access leverage in order to speculate from global currency flows and news events. Forex is also the largest and most liquid market in the work making it the last of the true arenas where fair market competition and real price discovery exists.
One of the main benefits of the Forex market is its superior liquidity. The foreign exchange market is the most liquid market in the world, this is one of the main differentiating factors between the Forex market and other financial markets. The foreign exchange market turns over 5 trillion dollars each day. Liquidity means that your assets can be quickly converted to cash without a price discount. This makes it easy to convert a large sum of money into a foreign currency with little impact on the price.
Generally, the amount required to trade Forex is lower than what would be required to enter into other financial markets.
Forex is typically traded on leverage. Leverage means that a lower initial outlay is required to control a larger position. For example if a trader had $1,000 in your trading account and had leverage of 100:1 the trader would be able to open a position with a value of $100,000. It is however important to note that although leverage gives traders the ability to open larger positions to maximize potential profits, the potential for loss is equally as large.
Unlike equity markets where short selling restrictions apply, there are no restrictions in the Forex market as to which direction you can trade. This means that if you believe that a currency pair is going to increase in value you can buy it or ‘go long’. Similarly, if you believed that the pair was going to decrease in value you could sell it, or ‘go short’.
The cost per transaction in Forex is less than a tenth of the cost of your average stock trade. This represents a huge saving.
In some exchange based markets, larger players have been known to move stock or commodity in order to gain an advantage. Given the deep liquidity in the foreign exchange market is it almost impossible to interfere with general market forces.
Due to the huge daily volumes of the Forex market there is always volatility. Increased volatility means more access to trading opportunities. You have the ability to pick currency pairs that suit your trading style.
For example, the AUDNZD might be a great currency to begin trading as a beginner due to its lower daily range and low spread. Whereas, the EURUSD might be better suited for an advanced Trader due to its large daily range and the speed with which it moves.
Forex is an over the counter market unlike the futures markets. This means that the contract sizes can be determined by the broker rather than an exchange. Forex traders have no fixed lot size and can trade any amount between 0.01 lots (1 micro lot) and 100 lots hypothetically. This gives Traders a greater ability to manage their risk.