Why Should We Learn about the Forex Market?
The Forex Market, also know as the FX or Currency Market, is the largest decentralized market in the world. This is a popular market for retail traders because of the leverage brokers provide traders and retail traders Forex because it is open 24 hours a day 5 days a week. This page will explain the basics of the Forex Market with an intro to explain if the Forex market is right for you.
Who are the players in the FX Market?
The Retail Traders (smallest group)
About the Spot Market
One reason why people like the Forex market is that it is a spot market. What this means to traders is that you are buying the currency “on the spot.” The way to help new traders understand this is by comparing it to the Futures market. With the futures market you are buying contracts on commodities for an in the future date.
You have the Ability To Set Your Own Trading Schedule
This is great for traders who have a busy schedule during the day. The Forex Market sees more volatility during the London session witch starts picks up at 7 pm EST. This means that it is Possible for people to trade after work.
One of the bad things to having the ability to trade 24 hours a day is that some people have a problem with over-trading. This could cause some traders to get burned out on trading. Another problem is that there are times when you shouldn’t be trading the Forex market to protect your account equity.
Low Funded Trading
One problem is that a low funded trader in the equities market are are at a disadvantage. Every you buy and sell a security it is $9 per transaction. That means each trade is $18. This is a problem because if you only had a $100 account you would be paying 18% in commissions alone. It is impossible to profitably trade paying such a large amount in commissions.
With the Forex market you can realistically trade with only $100 to $1,000 as a starting point. The Forex Market is know as a brokers market where you always pay the ask price and sell at the bid price. This means the broker takes the spread in-between. To put this into context with a lot size of .01 you would pay a brokers fee of .05 to .10 cents depending on the bid/ask spread in the market. This gives traders the ability to trade small accounts profitably.
Margin and Leverage
One of the things that is booth good and bad when it comes to Forex Trading is the leverage that the broker provides to you. Leverage is borrowed funds from your broker. The normal lot size is 1.0 in the Forex market which means that if you where to trade on lot of USD/EUR you would be trading 100,000 at a time.
Leverage is a good thing because it gives traders the ability to make money in the currency market. The currency pairs don’t fluctuate very much on a daily basis, so the leverage gives retail traders to make money in this marketplace.
The bad thing is that you are technically borrowing funds for trading. This means that your gains and losses are magnified. You should always use a stop loss in Forex because your account is leveraged. To further stress this point, in a Forex account you can loose more than your original deposit. You always want to use a stop loss to avoid what is know as a margin call.