Currency trading has many real world applications and is essential to international commerce. For example, if you want to buy cheese from France, you need to pay by euros. So, an importer from U.S. has to exchange the dollars to euros to complete the purchase. Also, tourists who travel around the world have to exchange currencies all the time.
You will be surprised to know that currency trading volumes are close to USD 5 trillion per day nowadays, dwarfing other financial markets. However, participation from retail investors is still fairly limited relative to equity and commodity markets. Here are some reasons why retail investors might want to try trading forex.
- The market is open for 24 hours from Saturday 7:00 am (New Zealand) to 5:00 pm Est. So, you can still do this from home even after doing a full-time job. You can also trade in between your work time or after you come back home from the office.
- Daily forex volumes are close to $5 trillion. The market is very liquid and this makes entering and exiting trades relatively easy and inexpensive. Unlike thinly traded stock markets, you won’t need to be worried about finding willing buyers and sellers.
- It is easy to express bullish and bearish views. If you want to short a stock, you will first need to arrange to borrow the shares with your broker. You may also need to pay stock loan fees as well. However, if you want to short a currency pair, you can simply decide to sell rather than buy the pair in the forex markets.
- Leverage is widely available for forex trading. Many brokers outside the United States and Japan will offer up to 200:1 leverage on forex majors. This means you can put on $20,000 trades with only $100 of equity. Leverage used correctly will help you magnify gains and grow your trading profits quickly.
One way to get started with forex trading is to open a demo account with a forex broker. It’s free to do and you won’t risk any money. Brokers will give you a practice account with somewhere around $10,000. You’ll have the ability to put on and close out trades. Even though the trades are fictitious they are executed with real market data. You’ll get a chance to familiarize yourself with trading software and gain some real trading experience.
Basics of the Forex Market
Here’s a nice introductory infographic about forex trading brought to you by CMS Forex.