Why Forex?
The foreign exchange market is also referred to as FOREX or FX and is where the trading of one currency for another takes place. Forex started to gain popularity in the early 70’s due to the movement of world economies from a fixed exchange rate to a flexible or floating exchange regime.
A floating exchange rate is one that allows its currency to fluctuate according to the foreign exchange market. The foreign exchange market became a popular trading commodity quickly because of the tremendous profits being made in the short term and the ease and liquidity of which currency is exchanged on that market. Another attraction is the forex market is practically seamless and transactions can be made 24 hours a day every Sunday starting at 5:15 PM EST, until Friday 4:00 PM EST.
In a fixed exchange rate the rates are decided by its government. But in a floating exchange rate the rate fluctuates according to the foreign exchange market. Although there are many factors that influence these changes making the calculations for rate fluctuations can be very complex.
The fact that world currency markets are constantly being changed by supply and demand for each given currency is the main influence. What makes calculations complex is the diversity of each economy being combined in a giant mixing bowl of each countries own economic climate, political conditions and monetary philosophies and their ability to change and influence each other.
Knowing this you can conclude that not just stocks but forex trading can also involve a great deal of risk. In fact some would say there are additional risks associated with forex trading because it is not a regulated exchange. But forex trading provides better leverage than with traditional stock trading. This allows traders to control longer positions with less capital.
The perceived advantage is it gives the trader more capital to trade more markets. The caution to this philosophy is proper risk management is vital. Without it a high degree of leverage can lead to large losses, as well as large gains. Additionally forex trading eliminates the middle man and the inherent costs associated with stock market trading. These are some of the reasons along with current downtrends in stocks that many traders are switching from the stock market to forex trading.
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Great review of forex trading with lots of interesting facts – an important read for every beginner in forex trading.