Why You Should Give the Forex a Second Look

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The foreign exchange market is the largest and oldest financial market in the world. It is the biggest and most liquid market in the world, and it is traded mainly through the 24 hour-a-day interbank currency market - the primary market for currencies. The forex market is a cash (or 'spot') interbank market. By comparison, the currency futures market is only 1% as big.

Foreign exchange simply means the buying of one currency and selling another at the same time. In other words, the currency of one country is exchanged for those of another. The currencies of the world are on a floating exchange rate, and are always traded in pairs: Euro/Dollar, Dollar/Yen, etc. In excess of 85 percent of all daily transactions involve trading of the major currencies: Australian Dollar, British Pound, Canadian Dollar, Japanese Yen, Swiss Franc, and the U.S. Dollar.

Unlike the futures and stock markets, trading of currencies is not centralized on an exchange. Forex literally follows the sun around the world. Trading moves from major banking centres of the U.S. to Australia and New Zealand, to the Far East, to Europe and finally back to the U.S.

In the past, the forex interbank market was not available to small speculators due to the large minimum transaction sizes and often-stringent financial requirements. Banks, major currency dealers and the occasional huge speculator used to be the principal dealers. Only they were able to take advantage of the currency market's fantastic liquidity and strong trending nature of many of the world's primary currency exchange rates.

Today, foreign exchange market maker brokers such as FX Solutions are able to break down the larger sized inter-bank units, and offer small traders the opportunity to buy or sell any number of these smaller units (lots). These brokers give virtually any size trader, including individual speculators or smaller companies, the option to trade the same rates and price movements as the large players who once dominated the market. Market makers quote buying and selling rates for currencies, and they profit on the difference between their buying and selling rates.

Forex trading has enjoyed exponential growth and widespread popularity over the past few years. It is only now that online foreign exchange trading is starting to get noticed. Until recently, large international banks were the big dogs in the foreign exchange market, selectively allowing access via telephone trading to Fortune 1000 companies, large funds, high-net worth individuals, etc.

But now, there are online trading firms that provide individual traders like you and I with direct access to the largest, most liquid financial market in the world. A lot of traders seem oblivious to this market. This unfamiliarity is the root cause of misconceptions about this exciting market.

Spot foreign exchange is the ideal market for active trading - more leverage than equities/futures/options. The market is highly volatile, has a tendency to trend strongly, and actively trades 24 hours per day. There are no limitations on when one can short a currency. Currency traders can make money when a currency is becoming stronger or weaker.

Another advantages of forex trading:

- Large returns
- Currencies trend well
- There are no commissions. Overall, FX has much lower transaction costs than equities or futures - an important point for active traders.
- The forex is a very efficient market
- High leverage: Each pip is worth US$10
- There is lots of movement in this market
- You can trade 24X5 from home or anywhere
- Little capital is required, as little as US$500
- You can easily start out by taking 20 pips a day
- You can trade whether you have a day job or not
- You can hedge. Not all market makers allow this
- All you need is an Internet connection; charting/dealing software is free
- This is real-time trading; 2.5 - 4 second response time; rare re-quotes
- Low lot size: 100 to one ratio; US$100 controls US$10,000 (1,000 = 100,000)
- Traders benefit from the ability to respond to breaking news immediately, day and night.
- More than one trillion dollars are traded every day in the FX market. The sheer volume of this market helps ensure price stability, as well as less gapping and price slippage.
- Normal bid/ask spreads are five pips or less, much tighter than a typical stock transaction.
- No uptick rule. It's easy to establish both short and long positions.
- Firms offer traders a 2% margin, compared to a 50% margin for equity markets.

Several common misconceptions of forex trading:

- Forex has a higher risk component than other investment alternatives. (It doesn't.)
- Technical analysis does not translate well into forex. (It does.)
- Fundamental analysis is ineffective due to central bank intervention. (Fundamental analysis is very effective.)

So, what are you waiting now?
Investment
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