Why Trade FX?

Liquidity

The Forex market is the most liquid market in the world. Most speculators focus on trading the highly liquid Majors where approximately 85% of trading volume occurs. Other currency pairs are less liquid and therefore increases liquidity risk.

Unlike the stock market, where slippage can be a real concern, high liquidity in Forex means that trades will generally be filled at the order price. There are always plenty of buyers and sellers which helps make sure spreads are narrow.


24-Hour Trading

Since the market is almost always open, traders can react to market, economic and political news as it happens, locking in profits, protecting profits and cutting losses. The main trading centres are Sydney, Tokyo, London, Frankfurt and New York. Trading takes place during five overlapping trading sessions starting at 9pm GMT Sunday evening and ending on 10pm GMT Friday Evening.


Leverage - Trading on Margin

Trading on margin means that a trader can utilize more capital than they have in their account. The volatility of currency pairs is usually less than other markets, such as futures and equities. Since there is less movement, traders leverage their capital to make money on smaller moves. The amount of margin available in Forex is as high as 1% (100:1 leverage), and generally up to 2% (50:1 leverage). With £2,000 of capital, you can trade up to £400,000 at 50:1 and £500,000 at 100:1. Your individual broker will set the level of margin required on your account.

If you were to trade £100,000 GBP/USD you would be required to have at least £1000 at 1% margin or £2000 at 2% margin in your account to open the trade. Trading on margin is a double edged sword. You can lose money equally as fast as you make it. It is therefore vital to have a full understanding of the FX market and not commit too much of your equity to each trade.


Lower Transaction Costs – Tighter Spreads - No Commissions

Most Forex brokers do not charge commissions, but instead make money on the dealing spread. The Dealing Spread is difference between the bid and ask quote. The Bid is the price buyers are willing to buy, and the Ask is the price that sellers are willing to sell at any given time. Under normal market conditions the dealing spread would be no more than 5 pips.


Trade in rising or falling markets

With FX Trading you can trade long or short which means you can take a view on any currency pair and place a relevant trade. If you feel that the UK economy is strong and the US Dollar will weaken against the Sterling you would execute a BUY GBP/USD order. By doing so you have bought British pounds in the expectation that they will appreciate versus the US dollar. If you feel the UK will continue to weaken and this will hurt the British Pound, you would execute a SELL GBP/USD order. By doing so you have sold British pounds in the expectation that they will depreciate versus the US dollar.