Why We Trade Forex
Compared to trading stocks, bonds, or commodity futures, the Forex market has some huge advantages:
Larger and more liquid. It means that faster and better order execution and no one can corner the market. The forex market is so huge and has so many participants that no single entity, not even a central bank, can control the market price for an extended period of time. Therfore manipulation against the small trader is not possible.
Fewer ‘tradeables’ to learn. You need to look at only 4 dominant currency pairs versus 72 commodities and more than 7800 stocks and bonds.
No commission and Low transaction cost. There area no clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for its services through the bid-ask spread. In addition, the retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as .07 percent.
Greater leverage (100/1). In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make extraordinary profits and at the same time keep risk capital to a minimum. We will explain this “leverage” in later section.
A 24-hour market. There is no waiting for the opening bell. This is very desirable for those who want to trade on a part-time basis, because you can choose when you want to trade--morning, noon or night.
Less money need to start and maintain a trading account. Online Forex brokers offer "mini" trading accounts with a minimum account deposit of $300. Some brokers offer less than that. This makes Forex much more accessible to the average individual who doesn't have a lot of start-up trading capital.
Pure technical Analysis. Forex work best on pure technical analysis – no fundamental rules or insider tips needed.
Furthermore, the high tech brokerage companies that make Forex trading available to you the trading platform, live quotes (buy and sell prices) and data feed for free, as well as many market analysis techniques built in, split-second response time to your orders, display of the profit/loss status of each trade as it is happening, and provide demo-trading and min-accounts for learners. What you need is a computer with a reasonable Internet connection speed.
Example of Forex Trade
The EUR/USD is always quoted as two numbers which are bid and ask prices. For example, the bid/ask of EUR/USD is 1.0120/1.0126, meaning you can buy 1 euro (EUR) for 1.0126 US dollars (USD). (But if you would sell 1 euro (EUR), you would get 1.0120 US dollars. )
Suppose you feel that the EUR is undervalued against the dollar. To execute this strategy, you would buy Euros (simultaneously selling Dollars) and then wait for the exchange rate to rise.
So you make the trade: purchasing 100,000 EUR (1 lot) and selling 101,260 Dollars. (Remember, at 1% margin, your initial margin deposit would be 1,000 Euros.) We will explain about margin later.
As you expected, EUR/USD rises to 1.0236/42. Since you bought Euros and sold Dollars in your previous trade, you must now sell Euros and buy Dollars (or another term is to close your position) to realize any profit. You can now sell 1 EUR for 1.0236 Dollars. When you sell the 100,000 Euros at the current EUR/USD rate of 1.0236, you will receive 102,360 USD.
Since you originally sold (paid) 101,260 USD, your profit is US $1100.
Before executing any trade, you should determine whether you want to buy or sell. If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader's talk, this is called "going long" or taking a "long position". Just remember: long = buy. When you buy, you will be using the higher quoted (bid/ask) price.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". Short = sell. When you sell, you would be using the lower quoted (bid/ask) price.