Many in the finance industry as well as everyday people may have given some thought to trading forex for financial gain. However, it is important for people to understand the benefits and risks of trading forex. Also, understanding the difference between trading the forex market and other financial markets, such as the stock market, will help an investor create a comprehensive and informed trading strategy.
The Double-Edged Sword of Leverage in Forex
Traders may be attracted to forex because it allows for large amounts of leverage. This allows traders to control a position of large value with only a small amount of cash up front. The majority of market makers in the forex industry have low margin requirements.
For instance a trader may hold a position worth $100,000 USD while only investing $1,000 in his or her trading account. The trader is technically borrowing the remainder of the trade’s value from the forex broker or dealer. This allows for possible large gains with just a small fluctuation in the market while it can also result in massive losses.
The forex market is the only financial market that is actually open for trading 24 hours per day while still maintaining significant liquidity during all hours. This is possible because the major forex trading hubs are located throughout various time zones worldwide. Currency traders, unlike stock traders, do not have to wait for the opening bell to begin trading. This makes forex an ideal market for traders who may work a day job and are not able to trade full-time.
However, each trader is different and the choice whether or not to trade forex will depend upon one’s risk appetite and how much capital a trader has available. It is also important to manage risk while also being able to capitalize on market moving factors in order to gain profits. Therefore, being educated about global markets, economics and relevant current events is essential in trading currency successfully.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.