By financen | October 12, 2010 - 4:27 pm - Posted in Forex

Although most people have never even heard of it, the foreign-exchange market is by far the largest financial marketplace in the world. Each day over $4 trillion changes hands in this market! To put into perspective how much money that is, consider this: if you were to add up the average daily turnover in the New York Stock Exchange with the average daily turnover in every stock exchange in America, Europe, and Asia, the total dollar amount would still fall far short of the $4 trillion that changes hands each day in the forex market.


The reason most people have never heard of the forex market is because it is still very much in its infancy stages as an open marketplace. Until the late 1990’s, the only players allowed in the forex market were international investment banks, large hedge funds, and very wealthy individuals. It wasn’t that no one else was allowed to trade in the market by law, but the minimum contract size with most dealers was generally between $100,000 and $1,000,000; thus, anyone besides banks, hedge funds, and very wealthy people simple could not afford to hold even 1 single contract.

The advance of the internet and technology changed that, though. Today, a trader can open a small online retail forex account with as little as a $100 deposit. Retail brokers have negotiated with large banks such as Goldman Sachs, Bank of America, etc, and landed deals where instead of passing through single orders of $100,000, they pass through hundreds and hundreds of order each day for very small amounts, but in the end, there is still a large enough amount of order going through to keep the banks happy.

Forex trading has literally exploded in the last ten years. There are many advantages to trading in the forex market over the stock or commodity markets.

Increased Leverage

This is probably the single greatest draw for most investors, and, unfortunately, it is also the single biggest cause of traders blowing out their accounts and losing all of their money. In the forex market, traders can leverage up to 200:1 or even more with some brokers outside the United States. In the U.S., the National Futures Association has capped leverage at 100:1.

This means that after checking a forex broker review and depositing funds with a broker, traders can control a $100,000 position in the market with a $1,000 deposit. Any profits a trader earns with that $100,000 position, he gets to keep, but that size of leverage can easily kill an account. For example, if a trader is trading a $100,000 position in the forex market, then each pip is worth $10. If his account equity is only $1,000, then he can only allow a 100 pip move against him. Once he loses 100 pips, his account will be at $0. If a trader were taking multiple positions during a highly liquid time of the day, he could easily lose 100 pips in a matter of minutes.

24 Hour Market

The forex market is not a centralized market. Instead, it is a loosely connected network of international banks and large financial firms. Thus, the market never closes from Sunday evening to Friday late afternoon. Liquidity simply moves from one time zone to another. This allows traders to trade around the clock and they do not have to deal with gaps and overnight event risks.

Depth of Liquidity

The market is so large, liquidity is always present and the market cannot be manipulated by large players as stocks can.

Low Transaction Costs

Compared to the stock market, transaction costs in forex are a fraction of the price. On 1 single contract of $100,000, a round turn commission will usually range between $10 and $20.

The forex market has many advantages, and it is only going to grow larger as more investors become informed and aware of its many benefits.

This entry was posted on Tuesday, October 12th, 2010 at 4:27 pm and is filed under Forex. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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