Forex is the largest financial market in the world, and its popularity among retail traders has exploded in recent years. Forex is, in fact, one of our most popularly traded instruments, with pairs such as EUR/USD, GBP/USD and EUR/GBP registering high interest among our traders. So why is the forex market so popular, and what are the reasons you may want to trade it?
The daily traded volume in the forex market is in excess of $5 trillion. Unlike the commodities and other markets, forex does not have its own exchange and is an over the counter product. For many traders, because of its size, it is thought to be the purest market out there.
Forex is always traded in pairs, meaning that you would choose to either buy or sell the value of one country's currency in exchange for another, for example EUR/USD. In this currency pair for instance, if you believe that the value of EUR will rise against USD, you would go long or buy EUR/USD. Conversely, if you believed that EUR will fall against USD, you would go short or sell EUR/USD. When trading forex, the first currency is always known as the base currency while the second currency is called the counter currency.
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This is another benefit that trickles down from the sheer size of the daily volumes in forex. All markets have a bid/offer (or bid/ask) spread – a price at which you buy and a price at which you sell. The wider this spread, the more the market has to move in your favour for you to break even on the trade, let alone start to profit. For major currency pairs such as GBP/USD and EUR/USD, this spread can often be just one point (often referred to as one pip) or even less. This makes the cost of trading forex arguably the lowest out of any financial market.
It takes a lot to force a major change in direction of a particular forex pair. Unlike individual shares, forex pairs are not subject to annual results disappointment, profit warnings or dividend cuts. They are affected by major economic events such as interest rates, a country’s economy changing direction or even political unrest. As a forex trader, it is therefore important to keep track of geopolitical and other global developments, as these could have a major impact on market trends and forex prices.
In theory this should make the future direction easier to predict than other markets that can be buffeted by relevantly insignificant factors. The fact that forex is used as a barometer for major economies is one that appeals to both technical and fundamental traders alike.
Forex is a truly global market, with no central exchange – unlike for example the London Stock Exchange or the futures markets in Chicago. It follows the sun around the world, throughout the week. Trading starts Sunday evening UK time, as the Asian markets open up for business. Focus then switches to the European time zone, and when these traders pack up for home the baton is passed to New York. As New York winds down, once again Asia opens for business and the cycle repeats, through to the close in New York on Friday.
For most traders a market has to move up or down for them to profit – they want at least some degree of volatility. This is another of the reasons to trade forex. There is seldom a dull day. Even on the quietest days, the major forex pairs will usually travel through ranges of 30 to 70 points. Many will see this as an opportunity to try and profit from day trading. When markets really move, it is not rare to see moves in excess of 100 points. It is this volatility that is a major draw for retail traders like you to the forex market.
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CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.