The Forex market is the largest (by dollar value of trading volume) and most liquid financial market in the world. Trading Forex is, indeed, immensely popular.
Forex trading on a wide scale sprang up along with the rise of the internet, which enabled investment brokers to offer individual retail traders access to this asset class, something that had previously been limited to large institutional traders such as banks and hedge funds.
The internet provided retail traders with easy access to the market and online trading platforms to facilitate trading.
Forex trading has exploded in popularity since the turn of the century for several reasons, including the following:
Easy Access; Low Entry Costs
Leverage
Continual Trading Opportunities
High Liquidity; Low Bid-Ask Spreads
Ease of Short Selling
EASY ACCESS FOR THE SMALL INVESTOR
One of the main attractions of Forex trading is that it’s an investment arena that small investors can easily enter.
The Forex market features very low entry costs
You might think that becoming a “currency trader” requires a lot of start-up capital but it doesn’t.
Getting started in Forex trading doesn’t require anywhere near the kind of investment capital that it takes to start investing in stocks or commodity futures. The Forex market features very low entry costs. Many traders open a Forex trading account with initial deposits of just $50 to $100.
How is it that getting into Forex trading is so inexpensive?
The answer to that question brings us to the second reason why so many people trade the Forex market leverage.
THE POWER OF LEVERAGE
What makes it possible for traders to operate in the Forex market with just a small amount of trading capital is the unprecedented amount of leverage that’s available in Forex trading – up to 1000:1 leverage.
High amounts of leverage translate into magnified returns
Even the most highly-restricted Forex trading – that’s regulated by the United States offers up to 50:1 leverage.
The high amount of leverage available is further enhanced by the fact that Forex brokers commonly offer trading in mini- and micro-lots. A mini-lot is one tenth (1/10th) the size of a standard lot, and a micro-lot is one-one hundredth (1/100th) of a standard lot.
Using leverage that only requires traders to put up a small margin deposit to take a trading position (much the same as in trading futures) means that Forex traders can, for instance, buy or sell short five micro-lots with a margin deposit of only about $5.00.
High amounts of leverage translate into magnified returns.
For Example
A trader who invested in five micro-lots of EUR/USD with only a $5 margin deposit could double that $5 from just a 10-pip move in the market. If the market moved 100 pips in the trader’s favour, their $5 investment would earn him a $50 return.
A trader trading standard lot sizes might have to put up 100 times more in margin money, but that’s still a relatively small amount of investment capital – just $500 to trade five standard lots. Now what would their profit be from a 100-pip move in their favour? – $5,000! ($10 x 100 x 5 lots = $5,000)
That’s a $5,000 profit, from a $500 investment, and all in one day.
(Traders do need to keep in mind that just as it magnifies profits, leverage also magnifies losses, and a trader can lose more than their original margin amount put up for the trade.)
OPPORTUNITIES
Another major attraction of forex trading is the fact that there are continual opportunities to make trading profits. The currency markets trade 24 hours a day, five days a week, and the markets are actively traded throughout each day.
Expert tip
The average daily trading range for the major currency pairs – EUR/USD, GBP/USD, USD/JPY, and AUD/USD is typically 80 to 100 pips. Depending on what lot sizes they’re trading, a Forex trader can realize a substantial profit on as little as a 10 or 20 pip fluctuation in the exchange rate of a currency pair.
Forex traders can generate significant profits every trading day.
Examples of Major Currency Pairs
Forex trading allows you to trade currencies from all around the world
The possibility of earning a good day-to-day living attracts many people to the Forex market. The high volume of trading in the Forex market makes for a very liquid market where bid-ask spreads are attractively low.
Combined with minimal commission charges, this means that Forex trading offers very low transaction costs as compared to other investment instruments.
Trading opportunities in the Forex market are further amplified by the fact that in Forex trading it is just as easy to sell short as it is to buy long. There are no restrictions on short selling like those in stock trading.
Traders can profit just as easily from falling market prices as from rising market prices.