In this second lesson, we will talk about “why trade Forex”. This is a question most people ask. Why can’t they just trade stocks or bonds or any other financial securities available, why must it be forex? –well, you will all find out today.
Also there are another category of people I call this people “the sheepies” because, they just trade Forex without knowing or even bother asking “why” –luckily for them, they will find out the reasons why they should trade forex compare to other markets.
Individuals just want to venture into it (forex trading) either because one of their family members or friends is earning big from it or they saw an online advertisement promising them hundreds or thousands of dollars weekly.
It is time to really understand “why trade forex”, the advantages it has over other financial markets and why it keeps growing daily with an average transaction size of $3 trillion daily.
Below are some of the reasons why so many people are choosing this market:
No or less commissions
I remember some time ago in a local business magazine, I saw a price table which some brokerage firm in my country charge for buying a share of a stock and how much it cost selling off those same stocks, so technically brokerage firm make their profit either you end up winning or losing. But when trading forex there is No clearing fees, NO exchange fees and NO government fees.
NOTE: Brokers are compensated for their services through something called the bid‐ask spread WHILE ECN brokers receive a small commission for sending your order to their liquidity providers.
Most people mistake the term “middleman” to mean brokers but the truth is that a middlemen is a market dealer that gives you his or her own price which his willing to buy or selling a commodity, currency etc. with the improvement of technology, ECN brokers now offer you direct Bid and Ask quote price from the market without any interference.
No fixed lot size
In other financial markets such as the futures markets, lot or contract sizes are determined by the exchanges. For example, a standard lot size contract for silver futures is 5000 ounces. In Forex, you are given the option to determine your own lot size. This allows traders to participate irrespective of how small their account size is you can even start trading with accounts as small as $100.
This one of the advantages the Forex Market has over all other market “SPREAD”, spread can be a big challenge when a trader want to quickly enter into the market and go off immediately. The spread on commodities, stock and other financial assets can be killing but the average spread on major pairs such as EURUSD is less than a pip while on other pairs it is between 1-3 pips.
A 24‐hour market
Another reason why the forex market is loved by all; why wait for hours to enter into a trade or even to exit. In the forex market, there is no waiting for the opening bell ‐ because from Sunday evening to Friday evening, the forex market is awake and ever ready to attend to you the Forex market never sleeps. This is awesome for those who want to trade on a part‐time basis, because you can choose when you want to trade‐‐morning, noon or night.
No one Control the market
The FOREIGN EXCHANGE MARKET is so huge and has so many participants – commercial banks, central banks, etc. that no single entity (not even a central bank) can control the market price for an extended period of time. This is good news because you don’t need to be afraid of any “financial coup” in the market.
One of the wonders in Forex trading is that, a small margin deposit can control a much larger contract size. What that simply means, you can use your little deposit to control a much larger capital.
Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on.
But leverage is a double‐edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
Because of participates in the market which are banks, hedge funds etc. Forex Market is so enormous and extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never “stuck” in a trade because there is always somebody to take the other side of your trade.
You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
Free Demo Accounts, News, Charts, and Analysis
Every one love the word “free” especially when it comes in making money. Most online Forex Brokers offer “demo” accounts to practice trading, along with breaking Forex news and charting services. All free, all free I tell you!
These are also very valuable resources for traders who would like to test their trading skills with virtual money before opening a live trading account.
Different Account Type
Most brokers if not all offers different account types which are suitable for various traders with different features and deposit limit. Such account types are cent, mini, classic and standard account