The Foreign Exchange Market (FOREX) is a lucrative market with huge gains to be made by an investor. In this article, we will be looking at some of the few features that make Forex the cynosure of eyes of traders.
- Forex Volatility
- High Liquidity
- Low Capital Requirements
- Low Transaction Costs
One factor that makes forex the best market is the huge gains one can make from the many price swings that occur during the duration of trading hours (which is 24hours a day through the week). The large number of currency trades each day translates to high liquidity in the market and this can cause the movements of the price of different currencies to be extremely volatile. Forex trading enable traders to speculate on what they feel the positions on different currencies will be and there are so many forex pairs on which traders can capitalize on and reap large profits.
Another pro that is associated with trading on the foreign exchange market is its high liquidity. Due to the free entry and exit that exists in the market, there is a high volume of participants in the market that can be matched within a fraction of a seconds. Due to its large number of participants and the high liquidity of its currencies, the possibility of manipulating prices and creating price anomalies is reduced. If not eliminated, large orders of currency trades can be easily filled without any sizeable deviations in price thereby, tighter spreads are enabled which will lead to increased efficiency in pricing.
LITTLE CAPITAL REQUIREMENTS
This is one of the biggest gains traders in the foreign exchange market stand to enjoy from and this can be achieved via leverage trading. Leveraged trading is the use of borrowed funds to increase one’s position while trading beyond what would have been available from their cash balance. Leverages are rates by which a trader’s deposits are increased by the provider or broker. This simply means that traders do not pay the full cost of trade but rather put down a fraction of the cost. This can make starting your career as a forex trader very easy as leverage trading can help you lessen the financial resources you need.
So let’s say a broker gives you a leverage rate of 1:200. What this means is that your initial deposit of let’s say N100 will be turned into N20000 worth of trading funds. This will cause pay-out to increase significantly. However, there is a risk associated with this as the losses are also amplified as well. Hence this is a feature that should be taken with much care. Brokers can decide to place a stop loss order to limit the potential loss.
REDUCED TRANSACTION COSTS
One of the reasons you should trade in the foreign exchange market is the fact that trading is usually done at very low costs in terms of brokerage and commissions from brokers. Consider other markets like equities and other securities trading where the brokerage structure is diverse and attracts commission charges. In forex, you need not worry about separate brokerage charges as brokers create their own pay-out from the spreads between foreign currencies.