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Why You Should Consider Trading Forex
08/08/2012 6:00 am EST
Want to get your feet wet with currency trading, but don't know where to start? Read this short introduction from Huzefa Hamid.
Over the last decade, forex (or spot currency) has seen an explosion of interest from traders, combined with a similar explosion of services from brokers to education providers.
Even though retail forex is very new compared to equities and commodities, it has fast become a mainstream of retail trading. -Previously, forex trading was only available to banks and some high-net-worth individuals.
All this should come as no surprise: Forex is the largest single market; it surpasses the size and volume of all the global equity markets combined. So when brokers started offering retail forex, the uptake was always going to be quick.
Today, traders simply can’t afford to ignore forex. The costs of trading forex, e.g. commissions and spreads, are minimal. And unlike stocks and futures, leverage and order size can be controlled, so even the smallest accounts can be used for short-term daytrading and long-trading positions. How many other instruments allow you to start off trading just as efficiently from a $200 account to a $1 million account and beyond?
The flexibility doesn’t end there. Forex by its very nature is international, meaning you can trade it around the clock. Few of us come into trading without work or other commitments in our schedules, and forex is ideally suited if this is your case.
For example, if you live on Eastern Time and have a regular day job, US equities are inaccessible. However, Asian currencies such as the Japanese yen are very active from 7pm ET. Many traders love to trade the yen during this time. Of course, other currencies are tradable at this time though some move less in the evenings.
How complex is forex trading to enter? Forex, of course, has its own lingo but has many similarities to regular equities and commodities. Technically, price charts are the same: Bars and candlesticks are used, and the same tools are available, such as moving averages, MACD, etc.
The fundamentals in forex focus on macroeconomic data and sentiment, e.g. inflation, GDP etc. It is often the same data you would consider for a major stock index such as the S&P. And economic releases are normally scheduled and easy to plan around.
The key factor that makes forex different is that you don’t trade a single currency; rather, you always trade a “currency pair.” For example, you don’t buy the euro alone; you have to decide what currency to sell against it. If you choose to sell the US dollar, you have bought the euro-dollar pair, or EUR/USD. This takes a little getting used to at first, but it quickly becomes second nature.
Forex brokers are very well regulated and covered by their relevant authorities, such as the National Futures Association in the US or the Investment Industry Regulatory Organization of Canada. (Forex does not have a central exchange, such as the NYSE for equities.)
If you haven’t looked at forex before, ask yourself: do you want to experience a market with more flexibility, more leverage options, and just as much if not more profit potential?
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