Chapter 2: Why Trade the Forex Market?

Why Trade the Forex Market?

• Why does the Forex Market even exist?

Many beginning traders find themselves wondering why the forex market exists at all. This is a good question and one you should definitely know the answer to before you go any further in learning how to trade the forex market or why should or should not trade it.

Currencies are very important to most people around the globe whether they realize it or not, this is because currencies must be exchanged in order to have international trade and business. For example, if you are a restaurant in the U.S. and you want to buy wine from France, the wine will need to be purchased from the French company in euro’s (EUR). This means that the U.S. restaurant would need to exchange the equivalent value of U.S. dollars (USD) into euros if they wish to get the French wine they desire. Another good example is traveling. An American tourist in Australia can’t pay in U.S. dollars to see an opera at the Sydney Opera House because it’s not the locally accepted currency. As such, tourists must exchange their U.S. dollars for Australian dollars at the current exchange rate, if they wish to purchase goods and services in Australia.

• Why trade Forex?

The primary reason why the forex market is the largest, most liquid financial market in the world is because people, businesses, and governments need to exchange currencies. The FX market dwarfs other markets in size, even the stock market, according to the Bank for International Settlements, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, as of April 2007.

So what does this dense trading volume mean to you? Well, it means price stability, the forex market is the most liquid market in the world, and this means you can generally almost always get in and out of the market at the exact price you set your order at. This in comparison to the stock and commodity markets which due to not have the same density of liquidity and as a result are more susceptible to slippage, which is essentially when the price you think you are getting in or out at ends up being different, not typically a good thing.

The forex market offers trader’s access to leverage of up to 200:1, with more buying power you can increase your total return on investment with less cash on deposit. Naturally however, increasing leverages also increases risk. With $1,000 cash in a margin account that provides for 200:1 leverage, you can trade up to $200,000 in notional value.

Since the forex currency market is a true 24-hour market that is open from 5:00pm EST on Sunday to 5:00pm o Friday, you can trade on your schedule and respond to changes in the market as they happen. There are three distinct trading sessions that offer traders plenty of opportunity to profit in the market; the Asian session begins around 7:00pm EST, followed by the European session around 3:00am EST, and then the U.S. session which begins around 8:00am EST.

Proceed to Chapter 3 by clicking here: How do I get started trading the Forex Market?