By: How To Become A Forex Trader.
In times past, only the big wigs or the money bags were allowed to trade in the forex market. Some of the big wigs include multinational corporations, and major banks. They have the required financial muscles; as a result, they are able to play around with large trading volume and size. Technological and internet advancement had however brought about a change in all that and have now made forex trading available to all and sundry, even if they do not have the big financial muscle of the multinational corporations and banks. Over time, forex market has also become a very popular way of making extra income for many people.
Some of the benefits obtainable in forex trading are listed below
- It is available for the 24 hours of the day and it is only closed for trading during the weekends.
- It is highly efficient and very liquid
- It is highly volatile too
- The cost of transaction is very low
- It is easy to make use of high leverage
- Profit can be made both from bear and bull markets
Continuous, 24-Hour Trading
The forex market is thrown open for the 24 hours of the day as hinted above. It can be used as a secondary source of income after the usual 9 to 5 job. Buyers and sellers are always on hand on every of the time frames on which you may decide to carry out your trade and this ensures you are able to make profit on any time frame and on both bullish and bearish market movement conditions. With the time frame arrangement, the trader can easily add forex trading to daily activities.
Liquidity and Efficiency
Forex traders are able to buy or sell currency pairs at a price that has great proximity to the very last market price due to availability of lots of buyers and sellers in the market. In comparison with all the other markets in the world, forex market is undoubtedly the most liquid. Traders have access to trading volume that is 50 to 100 times bigger than what obtains at the NYSE.
Direction of movement of the Stock market can be determined by news coming out from the country where that particular stock is domiciled. If for example a company sacks one of its directors or the company had just produced a new product and it is being released into the market, these news will determine the movement of that company’s stock. If big companies decide to buy lots of shares of a particular company, this will also affect the direction of the sstock. Many of the news that affect the forex market are instant and you may be too late to catch in on them if you put your trust in the print or electronic media to get trading information.
Lots of factors have been known to positively or negatively affect forex market. While stock market may be affected by individual actions or inactions, forex market is too big for that and just an individual’s activity will be too small to have any meaningful impact. The forex market is not easy to manipulate at all due to its huge size. This means it is hard for anyone to get engaged in ‘inside trading’ the disadvantages suffered by the average trader is reduced a great deal. Every investor and traderin the forex market is trading on equal playing ground.
Note about price gaps:
If you have ever been involved in other markets aside the forex market, you would have heard of what is called price ‘gaps’. They come to being when market price changes its position without any gradual movement or change. For example, a share may have closed
at $10 yesterdayand it suddenly opens at $5 today due to one or more events that had taken place overnight while you were sleeping and the said price may decides to be on the downward movement all day long.
The issue of gap had been discovered to be one of the factors conferring uncertainty on the forex market. The problem of gap is more defined when stop loss is applied to trading. For example, a trader might have set his stop loss at 7 pips or $7 from his entry position because he/she does not want to remain in the trade if his position goes down in value up to $7. However the position may remain open all through the night and it will put the trader at a big loss.
Longer time frames like daily charts, 4-Hour and 3-Hour charts rarely have gap on them at all. This is unlike what obtains in smaller time frames.
Fluctuation of price brings about opportunity to trade. No trading opportunity occurs if the price of a share remains at the same value where you purchased it. This change in price or value is what is referred to as volatility. Volatility brings profit in forex trading. A trader is able to benefit from greater volatility with the combination of fewer trading instruments, high liquidity and big transaction volume, especially of the trader is a day-trader. Due to this high volatility, it is possible for the trader to make money on forex trading more than in shares up to 5 fold.
Volatility of the forex market gives an idea of how much the trader is able to make as profit. Forex traders can have access to volatility as high as 500, while stock traders are limited to volatility between 60 and 100.
This means that a trader involved in equity market will not be able to make as much profit as one involved in forex market.
Low Transaction Costs
Forex trading does not attract transaction fees or commission. The forex trader is only required to pay the spread for that trading position he is taking. ‘Slippage’ costs are also very rare due to the efficiency of the forex market.
‘Slippage’ is the price the trader is required to pay for entering a trading position at a lower level than intended. If for example a trader is charged $2.50 for a trading position he intended to pay $2.00 due to lateness in order execution, the slippage cost for that trade is 50 cent. Forex traders who trade with large volume are the most affected by slippage cost. There is excess supply of buy orders when such traders purchase large commodity quantity. Consequently, the price will shoot up due o the pressure applied. Their intended price would have shifted by the time they had beenable to make all the purchases they intended. They do an oversupply of the market when they sell their trading positions. The pressure makes the price to take a dip and at the end of the day, the selling price is lower than their original intention for making the sales.
It is possible; for an individual to trade on the forex market at relatively small cost due to intra-day volatility with high strength, minimum slippage and lower cost of transaction. This means the trader may expect that a particular opened position will only cost a spread of 0.03%. This means that the trader will only have to pay about $3 or 3 pip speared by buying or selling $10,000.
Banksand other lending house will rarely give anybody loan to trade forex market. The financial houses may find it rather difficult to get committed to any body’s trading ideas due to how very risky and unpredictable the forex and stock markets are. This means the stock trader will only be able to buy as much stock as the cash he has on him.
While stock may be limited in this regard, forex trading has an edge. Forex brokers make use of ‘borrowed money’ to trade. This means the trader can participate in a market that worth $10,000 and all he requires to participate is about $50 to $250 in his trading account. As a result, of leverage, an average trade with little money in his or her trading account can easily make profit from forex market.
Profit from a Bull and Bear Market
The increase in stock value leads to an increase in price of the stock and this necessitates an increase in profit. You will look to sell off your stocks when the price of the stock is taking a dip or it is moving sideways. No profit is ever recorded when the price is depreciating in stock market. This is a direct opposite of what happens in the forex market. In forex market, a trader can profit from both the upward and the downward movement of price of a commodity or currency pair. Once you notice that a particular currency pair is about losing value, you can decide to sell it and make good money in the process. Why is this possible? It is because forex trading has to do with buying and selling either member of a pair of currencies. As one currency is losing value, the other one is gaining in value and profit can be made from both movements. Consequently, some schools of thought have called the forex market an eternal bull market.