Foreign Exchange is nothing but the currency market, where any currency can be traded. It is also known as Forex.
Because of the following factors, the foreign exchange is being used widely. The following factors which lead to the wide usage of the Forex are:
- 24-Hour Trading: Traders can react towards the different situations of the market like economic, political news, locking in the profits, cutting losses, protecting profits etc because of market is kept open. As it is the 24 hour trading, five overlapping trading sessions are being provided. They start at 9pm GMT on Sunday evening and end up at 10 pm GMT Friday evening.
- Liquidity: This market has the highest liquidity ratio. Generally, the highly liquid majors are being focused by the speculators. The trading volume of the speculators will be around 85%. Liquidity risk increases with the less liquid currency pairs. Order price of the trades is generally filled by the high liquidity in Forex. But where as in the stock market, slippage will be a real concern.
- Because of the lower transactions: The Forex traders make money by dealing with the spread but they do not take any commissions. The difference between the ask quote and the bid is called as the Dealing Spread. Here the ask quotes is the price or the money at which the sellers want to sell on a given time and where as the Bid is the price where the buyers want to buy. The dealing spread will be around 5 pips for normal market conditions.
- Trading on margin: Apart from the capital which is there in the account the trader can use more capital who has main aim of trading on margin. When compared to the other markets the volatility of the currency pairs is less. On smaller moves the traders can make money by leveraging their capital, because of less movement. Generally the amount of margin available in Forex is 1% or 2%. The margin level required on your account will be set by the individual broker. Trading on margin is generally termed as the double edged sword, because of the following reason. As fast as the money you make it will be lost equally. So, it is very important to understand the FX market very carefully, and also not committing too much of equity on each trade.
- Trade on any type of market: Relevant trade can be placed with any type of currency pair. You can trade using either the long or short.
These are some of the factors which make Forex market become more popular.