Why Trade Forex?

Key Benefits of Forex Trading
The Forex market is becoming more attractive to traders because of some of the following:

Liquidity
The market turns over $1.8 trillion USD a day. This results in there always being a buyer and a seller. The trading volumes and trade sizes in Forex dwarf the capacity of any other market. The liquidity of Forex allows any speculator to open or close a position at will, 24 hours a day.

Access
The Forex market is open 24 hours daily, 5 days a week. Usually brokers do close over the weekend and public holidays. Check with your broker on their respective closing times. The market follows the sun around the world, with New Zealand being one of the first countries to open, typically at 8am Sydney time. The other important times to consider during the day are:

• Tokyo open – 10am Sydney time
• European Bond Market – 4pm Sydney time
• European Equity Markets – 5pm Sydney time
• London Open – 6pm Sydney time
• USA open – 10.30pm Sydney time
• London Close – 2.00am Sydney time
• USA Close – 5am Sydney time

During the day trading is on a continuous basis without any stop and resumption in trading to reflect the above opening times. Knowing these times simply allows you to know when the most liquidity is in the market. Clearly this is during Tokyo trading hours increasing to the European and USA open times. It is possible to trade at any time during the weekdays up until Friday USA close when the market does not trade over the weekend and re opens Monday morning. Usually you will only need to look for entries in the 3 hours after these market open times.

Leverage
Trading in Forex is done using contracts or “lots”. Each contract is approx. worth
$100,000 of the base currency you are trading. To trade a contract a trader does not need to physically have this amount of money in there trading account. Instead margin is applied in Forex trading and is expressed as a percentage of the $100,000.

Margin between different Forex brokers will vary but are typically 1-4%. A 1% margin means that a trader needs to allocate $1000 of the base currency per contract for each open position.
Therefore if you were to open a position with 5 contracts then physically in the market you are exposed to $500,000 of the base currency. For this exposure assuming a 1% margin requirement you would need $5000. This leverage gives gearing of 100:1 for 1% margin or 50:1 for 2% margin accounts. It is this gearing that allows traders to make large percentage returns on there capital.

Automated Stops
The Forex market is so liquid brokers can offer automated stops allowing traders to control risk. Even though in normal market trading most brokers will guarantee stop losses, there are times when physically it is not possible for them to do so. Over the weekend the market may gap when Monday morning opens and if you are in a position over the weekend with a stop loss it might happen that the market gaps through your stop loss.

If this is the case the broker may not execute your stop at the price you have, but rather where the market has gapped. Most traders will exit there position on Friday night to avoid holding positions over the weekend just in case due to geopolitical issues the market gaps. Another time where the market can gap is during the release of announcements.

When a major important announcement is released, and the result differs greatly from the expected value, you might have a large move of around 50-100 pips in the 1min announcement candle. This move will occur with gaps in it, and again if your stop loss order gets gapped you might encounter slippage.

Two Way Market
Currencies are traded in pairs, for example Dollar/Yen or Dollar/Swiss Franc. Every position involves the selling of one currency and the buying of another. If a trader believes the Swiss Franc will appreciate against the dollar, then the trader can sell dollars and buy francs. I.e. the trader is selling short the dollar against the franc. Forex trading allows profits to be taken from both rising and falling markets with the same ease. Shorting a currency is as easy as going long on the same currency.

Continuity of Price Action
Because the market is a 24-hour a day market and is open 5 days a week there are very few gaps. Thus the market does not gap through your stops. This means that risk can be controlled.

Minimal Slippage
Because the Forex market is so liquid, most trades can be executed at the current market price. In all fast moving markets, slippage is inevitable, however many brokers software reduces this problem by allowing you to get a quote just prior to execution.

You then have the option of accepting that quote and any slippage or rejecting the price.
A Forex internet trader does not have to phone a broker. All transactions are completed online. This eliminates the middleman (the broker) and therefore reduces transaction costs and makes the process of order entry much faster. It also avoids the possibility of a misunderstanding. Confirmation of trades is immediate and all trades can be printed for record keeping purposes. In the event of a temporary technical problem, brokers have a 24-hour a day dealing desk number that can be called to get in or out of a position.

Execution Costs
With most providers you will not pay commissions for the trades you enter. Again most providers will act as a market maker, not as a broker, and makes its earnings from the spreads that are embedded in the currency rates. When trading Spot and Forward transactions you may roll over your positions and then you will pay what is termed a “roll over”.

Narrow Focus
Rather than looking at the entire stock market of many thousands of securities, the
Forex trader is typically analysing just a handful of charts. These are referred to as the major currencies and some of these are listed below:

USDYEN US dollar/Japanese Yen
GBP/USD British Pound/US dollar
EUR/USD Euro/US dollar
USD/CHF US dollar/Swiss Franc
EUR/JPY Euro/US dollar

In addition to the above majors you would also look to trade the following minor
currencies:

USD/CAD US dollar/Canadian dollar
AUD/USD Australian dollar/US dollar

There are also cross rates like GBP/YEN and these can be traded, but based on liquidity it is best to stick to just the major currencies listed above. Since you are only looking at small number of charts you can better follow and understand the patterns in each chart.

Flexible Time Exposure
The trader can choose the time frame of exposure to suit his/her circumstances. Ie: trading daily charts or 5 minutes charts.

Simplicity
Forex trading is not as complicated as many other markets. These are no time decays,
implied volatilities, expiry dates, dividends, exercise prices, conversion factors, deltas, Vegas, elasticity, intrinsic values etc to deal with. Thus trading decisions are much clearer and the market is much fairer.

Identifiable Trends
The currency markets have demonstrated in the past substantial and identifiable trends. Each currency has its own personality and each offers unique historical patterns of trends, providing diversified trading opportunities within the Forex market.
Here are some examples of the EUR in various timeframes demonstrating clear movements in price action and therefore offering the opportunity of trading.
Daily Chart of EUR/USD
30-minute chart of EUR/USD
5-minute chart of EUR/USD

Diversification of an Investment Portfolio
The Forex Market is classified as a separate asset class to equities, properties and bonds. The Forex market is also highly uncorrelated with the mentioned asset classes. Therefore, investing a portion of one’s investments into the Forex market will increase the diversification of the investment portfolio.