What is Forex?
Foreign Exchange trading commonly referred to as Forex or FX is the exchange of one currency for another currency at an agreed price. The Forex market is the largest financial market in the world with over $5.4 trillion traded daily1, compare this with the approximate $34.52 billion daily average volume of the NYSE Listed Shares of the NYSE Group2. Over 85% of Forex trading is concentrated in the major currency pairs, which are combinations of the EUR, USD, JPY, GBP, CHF, AUD, CAD. The markets are at their most liquid during the London Trading Hours as over 38% of the global daily FX volume is transacted through the London Forex market3.
Why Trade Forex?
The FX market is the most liquid market in the world, making the cost of trading lower than other asset classes. Additionally, slippage is far less likely to occur than in other markets due to the depth of the market. In normal market conditions and size in the most liquid currency pairs you should see no slippage on your trades or orders.
24 Hour Global Market
The Forex market is not traded on a central exchange or in a physical location, it is an Over the Counter (OTC) market where trading occurs through electronic systems and the telephone, 24 hours a day from Sunday evening till the close on Friday night (United Kingdom Time). This 24 hour market means that gapping is less likely and allows traders to react to political, economic, technical and fundamental factors as they happen rather than waiting for the market to open.
The growth of the internet enabled Forex to be offered to retail customers, allowing them to trade Forex in milliseconds through an online broker. This coupled with leverage has bought about huge growth in retail customers now trading Forex. It is estimated that Retail FX daily trading volumes have grown from $10 Billion in 2000 to over $200 Billion in 20124.
Forex is a margined (or leveraged) product. This means that you can trade Forex with an initial deposit that is a small percentage of the total transaction value. This means that the rate of return, the profit or loss from the initial capital outlay, is significantly higher than in traditional cash trading.
Low Transaction Cost
Most Forex brokers do not charge commission on Forex trades but make their money from the dealing spread, the difference between where a customer can buy (the offer) or sell (the bid). Due to the high liquidity and 24 hour market the spread in currency pairs is small meaning the cost of trading is low. Other trading costs are also low, the initial margin required to trade FX is small and the financing rates, the cost to borrow the notional transaction value overnight are also lower than other financial markets.
Trade Long or Short
The exchange rate is affected by a huge variety of political, economic, technical and fundamental factors meaning that it is constantly moving and adjusting price wise. This variety makes forex trading interesting and exciting as it causes volatility, as prices can change rapidly in response to many factors creating trading opportunities.
Trading foreign exchange on margin carries high potential rewards but also high potential risks that may not be suitable for all investors. Before deciding to trade foreign exchange, you should carefully consider your investment objectives, level of experience and risk appetite. Past performance is not indicative of future results, which can vary due to market volatility. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.