Find out the risks and benefits of Forex trading
The Forex trading market provides excellent opportunities of making decent money to the traders who have day job or a very busy schedule because it remains open for 24 hours a day and has good liquidity throughout the day. The major trading hubs are located in different time zones throughout the world; hence there is no need to wait for a bell for opening or closing the market. As soon as the trading in the USA closes, other markets in the east provide opportunities to the traders by opening; therefore you can trade in the foreign exchange market at any time during the day. The Forex market is very liquid due to the availability of high leverage. Leverage helps the traders to make huge gains when prices make a favorable change and can also cause massive loss when the currency prices move in the opposite direction.
Although currency market offers more opportunities of making money, the risks are also very high as compared to the equities. High leverage means that the huge gains can change to damaging losses and can wipe out you trading account capital within seconds. All the new traders should understand that due to the involvement of the large amount of money, traders react quickly to the market resulting in the sharp movement in the price of the currency pair.
Currencies in Forex trading do not move as sharply as equities, it is the leverage that makes the market volatile by increasing the movement of the currencies. For example, if the leverage provided by your broker is 100:1 on $1000 invested in your trading account, you can control a trade worth $100, 000. If the price of the currency pair moves just by 1% against you, it will make you a loss of $1000 representing 100% loss.
The most important difference between the currency exchange market and the stock market is number of traded instruments. Stock market has thousands of stocks but there are only few currencies in the Forex market. Most of the Forex traders focus on mainly seven currency pairs out of which USD/CHF, USD/CAD, GBP/USD and USD/JYP are the four major currency pairs. USD/CAD, NZD/USD and AUD/USD are three commodity pairs. All other pairs in currency trading are the combinations of these currencies.
Some stocks in the stock market can hit a lower circuit or upper circuit, in these conditions it is very difficult to close or open the position. Moreover, it is very difficult to make profit in the declining market. Due to the strict rules and regulations, short selling is not allowed in the US stock market. On the other hand, Forex trading provides opportunities to make money in rising as well as falling market.
Due to extreme liquidity, leverage is high and margins are low in the foreign exchange market. The margin rates in the stock markets are not so low and at least 50% margin is needed but currency traders need only 1% margin. Furthermore, brokerage charges in the stock market are much higher as compared to the Forex market. Forex brokers take only the spread as their transaction fee.
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