Why Trade Foreign Currencies?
There are many benefits and advantages to trading Forex. Here are just a few reasons why so any people are choosing this market:
• No commissions.
No
clearing fees, no exchange fees, no government fees, no brokerage fees.
Brokers are compensated for their services through something called the
bid-ask spread.
• No middlemen.
Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
• No fixed lot size.
In
the futures markets, lot or contract sizes are determined by the
exchanges. A standardsize contract for silver futures is 5000 ounces.
In spot Forex, you determine your own lot size. This allows traders to
participate with accounts as small as $250 (although we explain later
why a $250 account is a bad idea).
• Low transaction costs.
The
retail transaction cost (the bid/ask spread) is typically less than 0.1
percent under normal market conditions. At larger dealers, the spread
could be as low as .07 percent. Of course this depends on your leverage
and all will be explained later.
• A 24-hour market.
There
is no waiting for the opening bell - from Sunday evening to Friday
afternoon EST, the Forex market never sleeps. This is awesome for those
who want to trade on a parttime basis, because you can choose when you
want to trade--morning, noon or night.
• No one can corner the market.
The
foreign exchange market is so huge and has so many partici***** that no
single entity (not even a central bank) can control the market price
for an extended period of time.
• Leverage.
In
Forex trading, a small margin deposit can control a much larger total
contract value. Leverage gives the trader the ability to make nice
profits, and at the same time keep risk capital to a minimum. For
example, Forex brokers offer 200 to 1 leverage, which means that a $50
dollar margin deposit would enable a trader to buy or sell $10,000
worth of currencies. Similarly, with $500 dollars, one could trade with
$100,000 dollars and so on. But leverage is a double-edged sword.
Without proper risk management, this high degree of leverage can lead
to large losses as well as gains
• High Liquidity.
Because
the Forex Market is so enormous, it is also extremely liquid. This
means that under normal market conditions, with a click of a mouse you
can instantaneously buy and sell at will. You are never "stuck" in a
trade.
• “Mini” and “Micro” Trading:
You
would think that getting started as a currency trader would cost a ton
of money. The fact is, compared to trading stocks, options or futures,
it doesn't. Online Forex brokers offer "mini" and “micro” trading
accounts, some with a minimum account deposit of $300 or less. Now
we're not saying you should open an account with the bare minimum but
it does makes Forex much more accessible to the average (poorer)
individual who doesn't have a lot of start-up trading capital.
What Tools Do I Need to Start Trading Forex?
A computer with a high-speed Internet connection and all the information on this site is all that is
needed to begin trading currencies.
What Does It Cost to Trade Forex?
An
online currency trading (a “micro account”) may be opened with a couple
hundred bucks. Do not laugh – micro accounts and its bigger cousin, the
mini account, are both good ways to get your feet wet without drowning.
For a micro account, we'd recommend at least $1,000 to start. For a
mini account, we’d recommend at least $10,000 to start.
How You Make Money Trading Forex
In
the FX market, you buy or sell currencies. Placing a trade in the
foreign exchange market is simple: the mechanics of a trade are very
similar to those found in other markets (like the stock market), so if
you have any experience in trading, you should be able to pick it up
pretty quickly.
The
object of Forex trading is to exchange one currency for another in the
expectation that the price will change, so that the currency you bought
will increase in value compared to the one you sold.
Example of making money by buying euros
Trader's Action EUR USD
You purchase 10,000 euros at the
EUR/USD exchange rate of 1.18 +10,000 -11,800*
Two ***ks later, you exchange your
10,000 euros back into US dollars at the
exchange rate of 1.2500.
-10,000 +12,500**
You earn a profit of $700. 0 +700
*EUR 10,000 x 1.18 = US $11,800
** EUR 10,000 x 1.25 = US $12,500
An
exchange rate is simply the ratio of one currency valued against
another currency. For example, the USD/CHF exchange rate indicates how
many U.S. dollars can purchase one Swiss franc, or how many Swiss
francs you need to buy one U.S. dollar.
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