Why Trade the Forex Market and Why is it Attracting So Many Participants?

October 13, 2008

The Forex market is vital to the general prosperity of the free world economy. Why? Some $1.5 trillion dollars worth of international currencies are bought and sold every single trading day. It is by far the largest traded market in the world. This volume of trade is equivalent to over six months of trading in the New York Stock Exchange, which has an average daily volume of $10 billion dollars.

Even though the major focus in this country in reference to investing has always been and still is the stock and equity markets, the Forex market is 150 times larger than the New York Stock Exchange. See the chart below for an illustration of the daily trading volume of the New York Stock Exchange, the US Bond market, and the Forex market.

As you can see the Forex market is by far the largest market in the world. Unfortunately from 1971 until very recent years the virtual owners of this market were the major banks, large brokerage firms, and multinational corporations.

Major banks, even the Federal Reserve (which most Americans are unaware is a privately owned bank owned by mega-wealthy international bankers) realize a large segment of their profits (sometimes as much as 40% or more) from trading currencies.

Up until recently if an individual wanted to trade currencies on the Forex market, the only way possible was to invest with a bank, which required not only a minimum of a one million dollar cash deposit, but this large deposit also had to be backed by a five to ten million dollar net worth.

As some time progressed a slightly better option was trading with a brokerage firm, which asked for a minimum deposit on average of a quarter million dollars. Then factor in the myriad of sophisticated communication and trading facilities necessary to trade, and this profitable market was unreachable to most individuals.

Accessibility

Fortunately for you and me, the Forex market has now been opened up to small-scale investors. Unlike the enormous amounts previously required by the banks and brokerage firms, comparatively far lower margin requirements are finally available, which now allows virtually any individual to trade this highly profitable market.

There are now many brokerage firms that specialize in trading currencies, which allow a minimum deposit that is much more reachable to most of us. In addition, the recent boom in computer and communication technologies has made this market accessible in ways previously exclusive only to large players. Thanks to the Internet, electronic trading is now possible for anyone with a computer and access to the internet to trade currencies.

Liquidity

There are many reasons that investors are being attracted in large numbers to the Forex market. One major reason is liquidity. This market can absorb trading volumes and per trade sizes that dwarf the capacity of any other market. On the simplest level, liquidity is always a major attraction to any investor as it allows one the freedom to open or close a position at will.

Another desirable aspect of Forex is when day trading currencies your trading account is always liquid. At the end of each day trading your account is liquid cash, totally accessible, unlike stocks and mutual funds, which normally tie up your capital for months at a time.

High Profit Potential and Predictability

Years ago, like stocks, futures markets generally moved slowly and steadily toward price points (up or down). However, since about the early 1980s virtually all currency markets have become increasingly volatile, and the time required for the same price movement has become considerably shorter. Now, with long-term speculation with stocks or equities becoming increasingly risky, trading Forex and taking advantage of its clear and predictable price trends is becoming increasingly popular.

Many investors are choosing to focus their energy on the currency markets simply because they offer the greatest predictable daily price movements, with the least risk. While professional fund managers at major banks may behave independently and view the market from a unique perspective, most, if not all, are at least aware of important technical chart points in each major currency.

As these important levels approach, the behavior of the market becomes more technically oriented and the reactions of many managers are often predictable and similar, thus market movements at these important technical levels can be predicted through simple technical analysis. These market periods may result in large price swings as substantial amounts of capital are invested in similar positions.

Furthermore, thanks to the computer revolution, home computers have become increasingly more powerful and affordable. This power, coupled with the ease of Internet access has afforded the most casual of investor the same real-time access to the market that the professional trader on the trading floor has available. If it werent for the instantaneous delivery of price information, and the ability of our computers to quickly analyze incoming information, day trading would not be possible.

Simplicity

Instead of attempting to choose a stock, bond or mutual fund from thousands available in the equity markets, the foreign exchange market deals primarily with just eight to ten different currencies. Along side the U.S. Dollar, four major currencies dominate the trading on the $1.5 Trillion dollars traded daily on the Forex markets. This is due by nature of their popularity, activity, volume, stability, and confidence.

Clear Trends

Any professional trader knows that trends are the essence of profitable trading, and knowing this makes the idea of trading currencies very attractive, because currencies are the worlds best trending markets! Many studies of trend following systems prove that currency trends are the most consistent and profitable!

Regardless of the type of trend following system used; long term, intermediate term or short term, currencies invariably outperform all other markets including stocks, bonds and other commodities. It should come as no surprise that some of the worlds most successful traders are currency traders.

Traders such as George Soros, Bill Lipschutz, and Bruce Kovner earn hundreds of millions of dollars per year trading currencies! It is a well-known fact in the world of currency trading that on one occasion the billionaire George Soros made in excess of one billion dollars in a day with a trade he executed on the British Pound/US Dollar.

One reason currencies trend better than every other market is because of their macro-economic nature. Unlike many commodities whose supply and demand fundamentals can literally change with the weather, currency fundamentals are much less random and far more predictable. In summary, currencies are one of the best all around markets, currencies represent the worlds largest marketplace, and have the most powerful and 10 persistent price trends, in other words, immense opportunities for profit.

In addition each individual currency offers it s own unique pattern of movements and trends, which provides investors diversification within the Forex market.

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