Why Real Traders Like To Trade Forex?
There is a lot of growing excitement and interest in Forex Trading. However, 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. Once people realise Forex Trading is very difficult they lose interest. These hopefuls end up asking themselves why real traders like to trade Forex if it is so challenging?
There are many scammers in the Forex Market. Scammers that promotes Forex Trading as a quick way to make money. Sadly, most beginners are never told how hard it is to succeed in Trading. Understanding the real reasons why successful traders find Forex attractive is very important. Hopefully, this article will provide some of the real reasons why some successful speculators and investors prefer trading Forex.
No Central Exchange
Stock Exchanges such as the New York Stock Exchange or the Johannesburg Stock Exchange are centralised markets. This means, if a trader wants to trade stocks through these exchanges they would need to complete their buy and sell transactions through the relevant Stock Exchange.
However, these exchanges are located in actual physical locations. Thus, traders can only trade stocks through these exchanges during the normal nine to five business hours of the relevant stock exchange. This limits the amount of transactions as well as the hours traders can trade.
In a central exchange, the bid and ask prices for stocks are completely controlled and decided by the Stock Exchange. This means the trader is mostly at the mercy of the Stock Exchange to offer good prices.
On the other hand, the Forex Market is decentralised. This means there is no central exchange. It operates electronically through a network of Banks, Hedge funds, Companies and Commercial Traders. This network is known as the Interbank market.
This electronic and decentralised network operates 24 hours a day for 5 days a week. Which means that traders can participate in the Forex Market for 120 hours a week. The flexibility and availability of this market is a major reason why real traders like to trade forex.
The bid and ask prices for currencies in the Interbank market is not regulated and not centralised. This means various market makers, such as brokers, make their own bid and ask prices. The result of this is a very competitive market where brokers try to offer their clients the best possible spreads, which is good for the trader.
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.
Trading without leverage means every dollar in your trading account gives you a dollar of buying power. With leveraged accounts, your broker gives you access to more buying power based on the leverage they provide you with.
This allows traders to trade much bigger positions in the markets with relatively small capital investments. Now, before you get too excited, there is a catch. Trading with leverage is also very dangerous. If a trader is not careful and does not follow good risk management they can wipe out an entire trading account with one trade.
Theoretically, leveraged accounts also means that it is possible for a trader to lose more than their original investment. However, with the modern application of Margin deposits and margin calls it would be very unlikely for a trader to lose more than he has in his account.
The brokers use things like Margin Deposits and Margin Calls in order to protect both themselves and traders against such scenarios. A Margin Call allows the broker to close trades once a trader is overleveraged and at risk of losing more than his margin deposit.
A broker does not want to be owed money by a trader that is not able to pay it back. Thus, it is in the broker’s best interest to implement measures to stop traders from losing more than they have deposited.
In the hands of professionals, leverage is a great way of growing an account. However, in the hands of gamblers, leverage is a great way of losing an entire account.
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. 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 even come close to the Forex Market.
High Liquidity is important for traders. The higher the liquidity, the lower the costs to trade. With a decentralised market there is great competition between brokers to offer traders more competitive prices. Higher liquidity also means more stability for the price. This good liquidity is another great reason why real traders like to trade forex.
The more stable price fluctuations are the better. This is where volatility comes in. When there is low liquidity in the market the price fluctuations can be very erratic. The high liquidity and low volatility means less wip-saw price movements which is good for traders.
To those who are new to Forex Trading, the dynamics of buying and selling can be somewhat confusing. In Forex Trading, we always trade currencies in pairs.
For example, we do not only trade Euros or Dollars, rather we trade the EUR|USD currency pair. In other words, we trade the EUR against the USD.
Placing a buy trade on the EURUSD currency pair, actually means you are buying Euros and selling Dollars at the same time. Placing a sell trade on the EURUSD currency pair, actually means you are selling Euros and buying Dollars at the same time.
This makes it possible to place both buy and sell positions in the Forex Market. We can profit from the market when it is moving up and when it is moving down. The ability to profit from bullish and bearish markets is an obvious reason why real traders like to trade Forex. Thus, you can sell a currency pair even though you do not physically own the currencies you are trading.
However, the exact theoretical explanation of how these transactions are structured is much more complex but that is outside the scope of this article. Our Price Action Forex Trading Course goes into more detail to explain these concepts.
Risk allocation is another reason why real traders like to trade forex. Successful investors and speculators find forex trading attractive because they are always conscious of risk exposure. Traders are also able to risk relatively small amounts of their equity on any number of trades.
It is possible, depending on the account size, to risk less than 0.1% of your equity. Some important factors that will influence this is the size of the account and the size of the stop loss.
A benefit of Forex Trading is that it gives traders the freedom to control their risk allocation for every trade they take. As long as a trader has enough skills, it is always possible to limit your risk.
However, most beginner traders act like gamblers and over leverage on their trades. This will certainly lead to traders losing entire trading accounts very quickly. A safe approach is to always try and trade within your means.
We hope that this article has shown that there is a lot more to trading Forex than most people realise. Similarly, the motivation behind why real trader like trading forex not about false promises of 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 will cause losses.
Do not fall for 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.