The Popularity of Foreign Currency Trading

August 3, 2017

 

Over the past several years, foreign currency trading has exploded in popularity.  The foreign exchange market is formally called Forex, an over-the-counter market in which currencies are purchased, sold or exchanged.  The main market participants are large international banks.  Some trades involve huge blocks worth hundreds of millions of dollars.  The Forex market is the most actively traded and liquid market in the world, far surpassing the combined volume of every stock exchange in the entire world.  

    

     Forex traders consist of central banks, governments, financial institutions as well as currency speculators and individuals.  Just like the stock market, there is a spread between the bid and the ask.  The ask is the price you pay when you purchase and the bid is the price you get when you sell.

 

     Forex trading always involves two different currencies and is expressed in the form of pairs.  There are a total of 18 different currency pairs which are quoted in the Forex Market.  The most popular and heavily traded currency pairs are the Eurodollar/US Dollar (EUR/USD), US Dollar/Japanese Yen (USD/JPY), British Pound/ US Dollar (GBP/USD), and US Dollar/Swiss Frank (USD/CHF).  The less popular but still heavily traded pairs are the Australian Dollar/US Dollar (AUD/USD), US Dollar/Canadian Dollar (USD/CAD) and New Zealand Dollar/US Dollar (NZD/USD).

 

     Although foreign currencies are easily traded by small investors the capital requirements sometimes make it difficult.  The Forex brokers require that you have enough funds in your account to cover the investments that you do.  If the position that you are in turns against you they could contact with a "margin call."  This is where you are required to increase the cash in your account because the position that you are in has moved in the wrong direction and started to work against you. If the firm cannot reach you they will sell the position to get you out.  The brokerage firms have minimal cash requirements which must be met at all times.  If you have a large bank roll this may not be a problem.  But if you are a small investor a few margin calls and bad deals could wipe you out.

 

     Binary options offer an opportunity to trade Forex currencies without the worry of margin calls.  Like all binary option deals you simply purchase a contract and it either expires in the money and you get your profits or it expires out of the money and you lose the investment.  Many small investors have entered the Forex world because of binary options.  With binary options you get to focus more on each deal rather than worry about getting a margin call from the broker.

 

     One huge benefit of investing in foreign currencies is that they are available for trading 24 hours per day.  Depending upon where you live there is Forex activity Sunday through Friday.  The Forex market is even open during most U.S. national holidays, although when this happens the market functions without the large American banks.  You must keep in mind that the lack of volume and active participation by the large banks makes investing difficult at certain times.  So, 24-hour trading is not necessarily advised.  The best times to trade Forex is at times when the major financial hubs are open, like New York City, San Francisco, Chicago, Toronto, London, Tokyo, Signapore, Hong Kong, and Sidney.

 

     So, the great news is that the Forex markets have opened up a brave new world for those who wish to go above and beyond the stock market.  But we must keep in mind that with more financial opportunities come more risk.  Each investor will have to decide whether to embark upon the currency markets or stay away.  This investor and author has his hands full just trading the stock market.  

 

                       

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