Reasons Why Real Traders Like To Trade Forex
Advertising about Financial trading has increased drastically in recent years.
More and more people are introduced to Forex Trading on a daily basis.
But, there is also a lot of bad advertising about Forex Trading.
The kind of marketing that paints a complete lie about what trading is all about.
It seems like the most people are drawn to Trading for the wrong reasons.
Newbies needs to know that Forex Trading is not a get rich quick scheme.
Usually when beginners realize this they give up on trading immediately.
However, Forex Trading can be a good investment if you approach it correctly.
There are good reasons why many investors prefer to trade Forex.
Understanding the real reasons why successful traders trade Forex is very important.
In this article, we’ll go over some of these reasons.
Below is a list of some of the things we’ll discuss:
- FX markets are not bound by business hours
- Competition among brokers means better prices for traders
- The love and hate relationship with Leverage
- Enough Volatility and Liquidity to go around for everyone
- Make money in both rising and falling markets
- FX brokers often offer more than just Forex
- It’s possible to manage your risk
FX markets are not bound by 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 centralized markets.
Centralized 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 decentralized.
Decentralized means there is no central exchange. It operates electronically through a network called the Inter-bank market.
Traders have access to the inter-bank 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.
Competition among brokers means better prices for traders
The second reason why a decentralized 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 asking 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 centralized.
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 centralized markets.
The love and hate relationship with leverage
Leverage is another good reason why real traders like to trade Forex. With leverage, it’is possible for traders to trade bigger volumes than their capital would normally allow.
So what exactly is leverage?
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 allowed leverage. This allows traders to trade much bigger positions in the markets with relatively small deposits.
Leverage is represented as a ratio like 50:1 and can range from 1 to 500. To see the total position size your leverage allows 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 entire accounts by using it 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 thing.
The way brokers do this is through the Margin and Margin requirements.
What exactly is Margin?
In basic terms, margin is the deposit required by a broker for a trader to open and hold any given position(s)
It’s not a transaction fee. The margin is something you’ll get back when you win or lose your trade.
Think of Margin like the collateral the bank requires in order to grant you a home loan. It’s not exactly the same thing but you get the idea.
So what does this have to do with negative balance protection? A broker will close all active open positions when an account is over-leveraged and at risk of running out of available margin.
This is what is called a Margin Call. It’s a safeguard that protects both the broker and the trader. It is something you’ll want to avoid.
A broker does not want to be owed money by a trader that is not able to pay it back.
It’s very important to remember that leverage is dangerous.
We won’t advise beginners to use leverage. First become consistently profitable.
Enough volatility and liquidity to go around for everyone
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 create high liquidity.
Think of Liquidity as the number 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 mean less whip-saw price movements. The is just another reason why real trader like the Forex Markets.
Make money in both rising and falling markets
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 realize that there is never any physical transaction or exchange. 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.
FX Brokers often offer more than just Forex
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 are also brokers who offer instruments like bonds, interest rates and various company shares.
This massive selection of instruments makes FX trading very attractive.
It’s possible to manage your risk
Risk is something that every trader will need to deal with. When you participate in trading there will always be a 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 among 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.
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