Overview of Forex Trading
Forex or foreign exchange trading is the hot new kid on the block. Like all investments, what separates gamblers from the winners is discipline and knowledge. While gambling is a lot more fun and full of adrenaline it is only discipline and knowledge that will generate lasting gains.
Why is Forex Unique?
As forex traders will point out forex is different than other types of investment opportunities because the forex market is the largest market in the world. It is also one of the most liquid markets in the world with trade occurring 24 hours a day.
In short, the forex market dwarfs other investment markets such as equities and futures several times over.
In addition, unlike other markets in which trading activity only occurs during fixed trading hours, forex trades can go on around the clock. This allows traders to determine their own working hours without having to be slaves to the New York, London, or Tokyo stock exchange. The problem for trading addicts is that this removes any natural punctuation marks signaling them to stop.
Also because of the volume of trade in all the world's currencies occurring on a daily basis there is less slippage. This means the difference in price between when you click the button and when the trade is executed is much smaller than in other trading activities.
Leverage
The amount of leverage available to the investors provided by the forex trading firms is what really separates Forex from other trading activities. Many firms offer 200 to 1 leverage which means a 1% change in the market can represent either a 200% gain or loss for the fully leveraged investor. For some, this has made forex a bountiful garden but for others it has been their Achilles heel. This is where discipline and knowledge must be truly put to good use.
The smart and disciplined investor uses the flexibility of the available leverage to create an investment risk management strategy appropriate for his or her knowledge. It can be a very conservative investment tool used by all the world's government or it can be the gambler's anonymous poster child depending on the user.
New traders are often attracted to the market due to huge potential for rapid gains. Ironically, they are the ones most likely to be harmed by the leverage phenomena. Many new traders lose their investment quickly due to the "jackpot" hunting mentality.
Relative Lack of Volatility of the Forex market.
Unlike the equities and futures market the forex market is largely unaffected by micro changes. While Steve Jobs quitting Apple would have no effect on the forex market it would have a huge impact on Apple stocks. forex is relatively impervious to these kinds of micro changes.
Forex prices are generally only influenced by huge capital flow between countries and major changes in government or central bank polices in the respective countries.
This means lack of volatility combined with the huge liquidity of the market means it is hard for a single individual to manipulate the market and its hard to get a unique advantage in terms of access to information. Understanding central bank policies and other relevant government policies can give you an edge.
Neutrality of Forex
While US stocks have traditionally have had an upward bias, forex is more perfectly neutral. The investor earns money because one currency goes up or down vis a vis the other. This lack of bias means one does not earn money by simply holding on to the investment over the long run as in blue chip stocks. Money is made by active trading in and understanding the market and may not be the best choice for the more passive investor.
Why is Forex Unique?
As forex traders will point out forex is different than other types of investment opportunities because the forex market is the largest market in the world. It is also one of the most liquid markets in the world with trade occurring 24 hours a day.
In short, the forex market dwarfs other investment markets such as equities and futures several times over.
In addition, unlike other markets in which trading activity only occurs during fixed trading hours, forex trades can go on around the clock. This allows traders to determine their own working hours without having to be slaves to the New York, London, or Tokyo stock exchange. The problem for trading addicts is that this removes any natural punctuation marks signaling them to stop.
Also because of the volume of trade in all the world's currencies occurring on a daily basis there is less slippage. This means the difference in price between when you click the button and when the trade is executed is much smaller than in other trading activities.
Leverage
The amount of leverage available to the investors provided by the forex trading firms is what really separates Forex from other trading activities. Many firms offer 200 to 1 leverage which means a 1% change in the market can represent either a 200% gain or loss for the fully leveraged investor. For some, this has made forex a bountiful garden but for others it has been their Achilles heel. This is where discipline and knowledge must be truly put to good use.
The smart and disciplined investor uses the flexibility of the available leverage to create an investment risk management strategy appropriate for his or her knowledge. It can be a very conservative investment tool used by all the world's government or it can be the gambler's anonymous poster child depending on the user.
New traders are often attracted to the market due to huge potential for rapid gains. Ironically, they are the ones most likely to be harmed by the leverage phenomena. Many new traders lose their investment quickly due to the "jackpot" hunting mentality.
Relative Lack of Volatility of the Forex market.
Unlike the equities and futures market the forex market is largely unaffected by micro changes. While Steve Jobs quitting Apple would have no effect on the forex market it would have a huge impact on Apple stocks. forex is relatively impervious to these kinds of micro changes.
Forex prices are generally only influenced by huge capital flow between countries and major changes in government or central bank polices in the respective countries.
This means lack of volatility combined with the huge liquidity of the market means it is hard for a single individual to manipulate the market and its hard to get a unique advantage in terms of access to information. Understanding central bank policies and other relevant government policies can give you an edge.
Neutrality of Forex
While US stocks have traditionally have had an upward bias, forex is more perfectly neutral. The investor earns money because one currency goes up or down vis a vis the other. This lack of bias means one does not earn money by simply holding on to the investment over the long run as in blue chip stocks. Money is made by active trading in and understanding the market and may not be the best choice for the more passive investor.