The Reasons for the Popularity of FOREX

In today’s financial markets, whether you are a small or large investor, the Foreign Exchange Market (FOREX) is the most profitable sector for your investments.

Unlike other financial markets, the FOREX market has no physical location, like a stock exchange for example. It operates through the electronic network of banks, computer terminals or just by telephone.

The lack of any physical exchange enables the FOREX market to operate on a 24-hour basis, spanning from one time zone to another across the major financial centers (Sydney, Tokyo, Hong Kong, Frankfurt, London, New York, etc).

In every financial center there are a lot of dealers who buy and sell currencies 24 hours a day during the whole business week.

The trading session starts in the Far East, in New Zealand (Wellington), then Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Maine, London and ends in New York and Los Angeles. Below are approximated trading hours for regional markets (New York Time):

Now, let’s look at the most important reasons why FOREX is so popular today:

Liquidity

FOREX is the largest financial market in the world, with the equivalent of $3-4 trillion changing hands daily whereas the volume of the stock markets is only around $500 billion.

Flexibility

Because of 24-hour trading, participants of the Foreign Exchange Market do not have to wait for a reaction to certain external events in the same way as other daily markets (stock or futures markets, for example).

In these other markets, it is normal for prices at the “open” of the next day to “gap” up or down from the previous day’s closing prices because, by morning of whatever time zone you are in, the opening price will have already factored in the impact of any relevant overnight events.

Depending upon your position, this may or may not be desirable so, generally speaking, you should aim to trade markets in your time zone to avoid the situation. That is where the 24-hour nature of FOREX is a great advantage.

Lower transaction costs

Traditionally, the FOREX market has no commissions (other than the spread - the difference between bid and ask prices).

Price stability

High liquidity helps ensure price stability when unlimited contract sizes can be executed at a fair price. It helps avoid the problem of instability, as happens in the stock market and other exchangetraded markets because of the lower trade volumes where, at any given price, only a limited number of contracts can be executed.

Margin

Margin size for trading on FOREX is defined in the contract entered between a client and a bank or a brokerage company, which provides opportunity for individuals to enter the market - usually with a capital requirement of just 1% of the contract value.

So, collateral of 1000 US dollars allows a trader to enter trades of $100,000. Such high leverage, combined with the rapid rate fluctuations make this market extremely profitable but at the same time extremely risky.