THE OPPORTUNITIES AND RISKS IN THE FOREX MARKET - Lesson 6
In this lesson you will learn:
- What are the Opportunities that the Forex market offers
- How to avoid the exposure to Risk while trading
Opportunities
The opportunities offered when trading are best judged by comparing the forex market to other markets, such as the equity markets. The stand out benefit of trading forex versus other securities is the low cost and low barriers to entry; it costs very little cash for a novice to take their first steps into the world of trading forex. Traders can open a forex trading account with a relatively small deposit amount, as low as $100 in many instances and still experience the same treatment as traders holding much higher balances.
Free Tuition
The free tuition traders can receive when opening an account is another benefit. Most respected forex brokers offer tutorials, webinars, and some even offer a free to access trader school, generally aimed at novice traders, to help get them up to speed and feeling confident that they're armed with the necessary tools and develop the confidence to trade the forex markets, both efficiently and successfully.
Lower Margin
The lower requirements required for trading forex, versus trading other securities, makes the industry an attractive proposition, especially for novice traders looking to take small, exploratory steps into the industry. Margin requirements are in many ways unique in the forex industry far lower than required for trading other securities and operating in other markets.
High Liquidity
The forex market is the most liquid market there is, therefore it's arguably the market which displays efficiency market theory best; as a $5.1 trillion a day market, the forex market can't be cornered, it can't be corrupted, it is subject to the macro, global, economic events far more than any other market, or sector. The significant movements in our forex markets, can always be cross referenced with economic announcements and events, or outlier events in a fast moving market.
Unrivalled Access
The forex market is truly a 24/5 market, the forex market is open from Sunday evening to Friday evening. This ensures that when trading during these hours you're not dealing in a synthetic market, you're dealing in the actual market. During certain times there is peak activity, generally when various countries' markets open, for example; when London overlaps with New York's opening, however, when you place orders into the forex market during its 24/5 opening times, you're always placing orders into the 'real' forex market.
Flexibility
The ability to short and go long in the market, the ability to profit from falling and rising markets, is a major advantage with forex versus trading other securities. Further, this opportunity offers up an excellent opportunity for traders to extend their knowledge, education and understating of how markers work, particularly the macroeconomic events that move our forex markets.
Leverage
Using leverage allows forex traders the ability to control a relatively large sum from a small commitment from a relatively small amount deposited in an account. This opportunity offers up an opportunity to profit, however, it is a double edged sword; leverage can also expose traders to a higher risk of losses. Therefore it's essential that novice traders understand how leverage can work, both for and against them.
Technological Advancements
The platforms forex retail traders are provided with (free of charge) to trade off, are some of the most technologically advanced in the wider trading industry. The forex industry has witnessed massive technical advancements made over recent years, for example; the world renowned and highly respected suite of MetaTrader retail platforms, provided by MetaQuotes, is comparable with the platforms accessed by institutional level traders.
Other advancements in the industry over recent years include the ability to trade forex from mobile phones and tablets, whilst the increased broadband speeds enjoyed over recent years, ensures that traders and brokers can witness orders filled closer to the prices quoted. This has indirectly led to a position whereby the spreads quoted by brokers have also reduced significantly over recent years.
No Commission, No Excess Charges, No Middlemen
The majority of respected and ethical forex brokers charge zero commissions, or fees for trading through their service. Moreover, if traders choose an STP/ECN broker there is in effect no middleman, the order is rooted straight through to be processed into the market, to be matched via the liquidity pool, created by the electronic configured network. No interference, no dealing desk, no manipulation of price, and unlike dealing desk, or market maker operations there's no temptation to trade against clients.
Fast Execution
The advance in technological improvements forex has witnessed over recent years, has ensured that orders are now executed (from award winning platforms such as MetaTrader 4), in milliseconds. This speed has been accentuated in tandem with the exponential rise in fixed Wi-Fi broadband and the mobile 4g-5g speeds we've witnessed and now come to demand as standard.
Risks
There can't be rewards without risk. There are risks involved when trading forex and in this section we'll cover the key risks which novice traders in particular face, when looking to enter the industry. However, as we've stressed throughout this module and in many of our various articles; if risk is controlled and its effects are understood and minimized, then the impact on our potential profits can be contained.
Leverage
The ability to control perhaps 100 units of a currency, by risking 1 unit of currency (leverage of 100 to 1), is a temptation that can cause difficulties for many inexperienced traders. Naturally the profit potential is magnified, but so is the risk; theoretically traders can make 100 units of profit for every 1 unit risked, but can lose in a similar ratio. Leverage can be poorly used by increasing it towards risky levels.
Fast Moving
The fast moving forex market can often confuse traders and leave them isolated, it's therefore essential that novice traders, particularly during the early stages of their fledging careers, avoid being caught out when markets are moving quickly. Perhaps avoiding the times when key economic announcements are made and avoiding trying to manually trade the data during such releases, would be advisable.
Slippage and Poor Fills
Slippage and poor fills occur when you're filled at a price further from the actual price you observed being quoted on your platform. It's worth bearing in mind that slippage can be both positive and negative, as you can often be filled at a better price than you were quoted. In many ways slippage can be looked upon as a positive outcome of trading forex in an ECN environment; its proof that you're operating in a pure market, devoid of any manipulation and interference.
Spot Market (Base and Quote Currency)
A foreign exchange spot transaction, also known as forex spot, is an agreement between two parties to buy one currency versus selling another currency, at an agreed price for settlement on the spot date, generally to be satisfied within 48 hours. The exchange rate at which the transaction is done is referred to as the "spot exchange rate".
