Reasons Why Real Traders Like To Trade Forex
There is a lot of growing excitement and interest in Forex Trading. With the help of social media thousands of people are introduced to trading on a daily basis.
However, it seems like the majority of people are drawn to Forex Trading for the wrong reasons.
Prospective traders need to know that Forex Trading is not a get rich quick scheme. Normally, the moment beginner traders realise that Forex Trading is actually very difficult they lose interest.
These hopefuls end up asking themselves why real traders like to trade Forex in the first place? Then there is also the scammers in the Forex Market. Scammers that promote Forex Trading as a quick way to make money.
Sadly, most beginners are never told how hard it is to succeed in Trading. They only see the fake and false advertisements with the fancy cars. That is not what real trading is all about.
Understanding the real reasons why successful traders find Forex Trading attractive is very important.
In this article, we’ll go over some of the real reasons why successful speculators and investors like trading the Forex markets.
The Forex Market is not bound by conventional business hours
Most people have heard of the New York Stock Exchange and places like Wall Street. Especially in the movies we get the picture of traders running around and screaming frantically to get their piece of the pie.
With Forex Trading the picture looks slightly different. You see, Stock Exchanges are centralised markets.
Centralised markets basically means that all the orders or transactions only go through one central exchange.
There are two important reasons why this is significant for Forex Trading. The first reason is due to the physical location of stock exchanges.
If I wanted to trade anything through a stock exchange I can only do so during their normal nine to five hours.
This places limitations on the amount of transactions traders can take.
It also means traders from other parts of the world is limited by the hours they can participate. In Forex we don’t have this problem because the Forex Market is decentralised.
Decentralised means there is no central exchange. It operates electronically through a network called the Interbank market.
Traders have access to the interbank market which operates 24 hours a day 5 days a week. This means there is no limitations with regards to physical location.
You are able to participate in the Forex Market from almost anywhere in the world. Also, you don’t have to wait for normal business hours.
You can participate anytime during the day as the Forex Market does not have business hours.
The flexibility and availability of this market is a major reason why real traders like to trade forex.
The Forex Market is not bound by one sided prices
The second reason why a decentralised market is so significant has to do with prices. If you want to buy or sell any financial asset there needs to be a bid and an ask price.
You can only buy at the price people are willing to sell at. Similarly, you can only sell at the price that people are willing to buy at.
In a central exchange transactions can be very costly as the exchange decides what the bid and ask prices are.
This is a challenge because there is no competition that can give you a better price. You are forced to buy and sell at the prices they have determined.
The bid and ask prices in the Forex Market is not centralised.
Various market makers compete with each other to provide various bid and ask prices.
The result of this is a very competitive market where brokers try to offer their clients the best possible spreads.
This is a much better environment when compared to centralised markets.
Leverage allows you to start trading with very little capital
Leverage is another good reason why real traders like to trade Forex. With leveraged accounts, it is possible for retail traders to trade bigger volumes than their capital would normally allow.
So what exactly is leverage?
In basic terms, leverage can be understood as a way for brokers to lend funds to traders in order to trade larger position sizes
Brokers give their clients access to more buying power based on the leverage the broker provides. This allows traders to trade much bigger positions in the markets with relatively small capital investments.
Leverage is represented as a ratio like 50:1 or 100:1 and can range from 1 to 500. To see the total position size your leverage will allow you can simply multiply your account size by your leverage.
HOWEVER, there is a catch!
Trading with leverage can be very risky and dangerous.
The uninitiated trader can wipe out an entire account by using leverage incorrectly. High leverage and bad risk management is a recipe for disaster!
With Leverage it’s possible to lose more than your initial investment. Scary thought right?
However, most brokers offer negative balance protection that protects clients from that sort of unwanted experience.
The way the brokers does this is through the Margin and Margin requirements set by the broker.
What exactly is Margin?
In basic terms, margin is the deposit required by a broker in order for a trader to open and hold any given position(s)
It is NOT a transaction fee. The Margin is something you will get back whether you win or lose your trade.
Think of Margin like the collateral or deposit the bank would require in order to grant you a home loan. It is not exactly the same thing but you get the idea.
So what does this have to do with negative balance protection? Whenever a trading account is over-leveraged and at risk of running out of available margin the broker will close all the open positions.
This is what is called a Margin Call. It is a safe-guard that protects both the broker and the trader. It is something that you will want to avoid.
A broker does not want to be owed money by a trader that is not able to pay it back.
It is very important to remember that leverage is dangerous.
We would not advise beginner traders to use Leveraged accounts until they are very comfortable and making consistent profits.
The FX markets has great Liquidity and Volatility
The Forex Market has an estimated trading volume of $5 Trillion per day. Huge trading volumes, coupled with millions of active speculators and other participants creates high liquidity.
Think of Liquidity as the amount of active participants and trading volume in the market at any given moment.
The Forex Market has the highest liquidity of any other financial market in the world.
Even the combined trading volume of the stock exchanges for London, New York and Tokyo does not come close to the Forex Market.
Think of liquidity in terms of a tap. The bigger we open the tap the more water is released. In the same way, the bigger the market participation, the more liquidity is available in the market.
High Liquidity is important for traders. The higher the liquidity or the flow of money, the lower the costs to trade.
Higher liquidity also means traders can get in and out of trades within seconds as there is always ample amounts of buyers and sellers in the market.
Higher liquidity also means more stability for the price. The more stable price fluctuations are the better. This is where volatility comes in.
Volatility in Forex Trading refers to the amount and size of price fluctuations and the speed at which those fluctuations occur.
Volatility needs to be considered in terms of size, speed and intensity.
When there is low liquidity in the market the price movements and fluctuations can be very erratic.
High Liquidity and stable volatility means less wip-saw price movements. The is just another reason why real trader like the Forex Markets.
You can trade the market up and down
The dynamics of buying and selling can be somewhat confusing to beginner traders. In Forex Trading, we never only trade one currency at a time.
We always trade currencies in pairs. In other words, we trade the EUR against the USD.
Below is an example of the most popular and most liquid currency pair in the world…we have more info on Currency Pairs in another article.
In FX we can BUY and SELL currency pairs. This means we can profit when the market is going up and also when the market is going down.
When a trader BUYS the EURUSD pair they are actually buying EUR and selling USD at the same time.
When a trader SELLS the EURUSD pair they are actually selling EUR and buying USD at the same time.
Forex Traders basically speculate on whether the exchange rate between two currencies. After this they can trade the market up or down, depending on the direction they think the exchange rate is going.
However, it is important to realise that there is never any physical transaction or exchanging. Don’t get too confused with this though. It can be very technical.
The basic point to take away is that the ability to profit in both scenarios is an obvious reason why real traders like to trade FX.
Forex Brokers normally offer a wide range of Instruments
There are so many financial instruments available to trade in the FX market. There are so many currency pairs to choose from.
It is true that not all brokers offer the same amount of instruments though. However, for the most part, all of them have a good offering.
Some FX brokers also allow you to trade Commodities. This includes things like Gold, Brent Crude, Silver and some agricultural commodities as well.
Then there are also brokers who offer various Indices. This will include things like the S&P500, NASDAQ, DAX, NIKKEI225 etc.
For the more experienced trader, there is also brokers who offer instruments like bonds, interest rates and various company shares.
This massive selection of instruments makes FX trading very attractive.
In FX you are able to manage your Risk Allocation
Risk is something that every trader will need to deal with. When you participate in trading there will always be risk. Without the risk there cannot be any reward.
You’ll never be able to avoid risk when you trade, but you can learn to manage it. Being able to manage risk is a big reason why Forex Trading is popular amongst investors.
So how do you go about managing your risk in Forex Trading? Well there are two ways to go about doing this…
1. The first way to manage your risk is to make sure not to over-leverage your account by trading too big lot sizes.
In FX trading you decide what lot size you want to trade on every trade you execute. We saw a bit earlier in the article how traders can trade large lot sizes with the help of leverage.
However, using leverage in order to inflate the size of your trade is very dangerous. Most beginners want to do this because they only see the potential reward. If they win, they can win big.
BUT, the opposite of over-leveraging is also true.
If you lose on an over-leveraged trade, you can lose big as well.
By setting your leverage are lower levels like 1:1 or 1:2 is a good way to manage risk. That way, you won’t be able to risk substantial portions of your capital.
When you are trading with a $500 account it might not be a big deal. However, when you start trading with serious capital you don’t want to risk losing big portions of your capital.
2. The second way is to make sure you always use a Stop Loss in your trading
So what exactly is a Stop Loss?
A Stop Loss is a safety measure that will automatically close a trade when it has reached a certain price or loss level.
For example, let us suppose that we want to place a trade and only risk $250. We can place a Stop Loss so that the trade will automatically close if it reaches a loss of $250.
The great thing about a Stop Loss is that you don’t have to be in front of your screen the whole time.
Once the Stop Loss is set you won’t be able to lose more than your Stop Loss amount if the trade should go against you.
So you see there are many ways that traders are able to manage their risk. However, most of these involve discipline to implement.
We hope that this article has shown that there is a lot more to trading Forex than most people realise. The motivation behind why real traders like Forex trading IS NOT ABOUT FALSE PROMISES OF QUICK RICHES!
There are very specific reasons why successful investors and speculators enjoy trading Forex. Trading can be a very lucrative investment if a trader knows what he is doing.
Similarly, if traded for the wrong reasons and with a wrong attitude can cause unimaginable losses. Do not listen to the fraudsters and scammers that promise your quick riches.
There are valid reasons why people trade forex, and getting rich QUICK is not one of them! This is why we always encourage and advise prospective traders to invest in Forex Training before attempting to trade with real money in the live markets.
Feel free to check out our Forex Blog on our website for more forex related articles.
Copyright © 2016 Jaba Investments (Pty) Ltd. All rights reserved