Why FOREX?

Pipruit: I want to ask you something – why is FOREX so popular? What does it have that other markets do not?

Why FOREX?

Commander in Pips: The simple and fastest answer is - major possibilities with minor requirements.

Pipruit: Uh, there is no prize for guessing that!

Commander in Pips: Ok, ok. Let’s point out some basic features that add up to FOREX’s strong attractiveness. We will start with the items that we’ve already discussed earlier and then will add some more reasons:

1. 24-hour FOREX market works all around the clock from 5:00 PM on Sunday till 5:00 PM on Friday in New York time. Even major holidays can’t close the market totally. Yes, trading volume can be reduced significantly, but the market continues to work. If you have a job and can trade only part-time during the day, this feature gives you huge benefits. First of all, it does not matter in what country you are living in, because the market is always at your service. Second, you can freely plan your day depending on your own circumstances and trade in the morning, during your lunch, in the evening or instead of sleeping. The market always there, ready to take your trades.

2. Low demand for start-up assets allows you to come aboard with as little as $5-50! The point is that FX retail brokers provide clients with possibility to open “mini” (usually $100-300) or even micro ($5-50!) accounts. I’m not saying that you have to enter the market with lowest assets that you can ever find. But, in fact, you could... This issue does make the FX market much more accessible for individuals who want to start trading, but have limited sums of money to start with.

Pipruit: But how can a trade be done with just $50?

Commander in Pips: In fact it could (but, as you will understand later it is not great idea to enter the market with just $50), because

3. There is no compulsory fixed standard lot on FOREX market. Although historically participants in the FOREX market use 100 000 units (for example US dollars) of currency as a standard lot, your broker may use any fraction of this lot, started from 0.01 part. Depending on your broker and trading account value you can use any lot size at your will (even 0.001 or smaller), or some fractions of single lot that are predefined by the broker. For example, your broker can limit the minimum lot fraction with no less than 0.1. But don’t be confused by these limitations, because brokers link the minimum lot size with client’s account value. It means that you will not be interested or need to trade with lower lot size if to your account assets are larger.

Pipruit: But now, I can’t understand, how we can trade even 0.01 lot size, which is 1000 units, with only $50 of account assets.

Commander in Pips: It is possible due to the

4. Solid Leverage of the FOREX market. In fact, leverage is an additional money loan that your broker provides to you for financing your own positions without any charge. You can’t withdraw this money, and it automatically returns to broker as soon as you will close your trade. In general, the lower your trading account value the greater the leverage. If you trade with a micro account broker may even provide you with 500:1 leverage. What does it really mean? Let’s assume that you have $50 in your account account and broker provides you with 500:1 leverage. It means that you can trade with a bit less than $50*500 = $25000 or, other words 0.25 lot! Usually, the greater the trading account value, the lower the leverage. Big participants usually trade with no leverage at all (Large banks, for example). The most common leverage size starts from 100:1 and then gradually reduces. Recently, the USA lowered the maximum leverage for US brokers to 50:1

Pipruit: Cool! I can imagine what kind of yield from trading it will give me! If I, for example, will buy 0.25 EUR/USD for 1.33 and sell it for 1.34, then I will get $250 ((1.34-1.33)*100 000 (it’s a standard lot)*0.25) just by using assets as low as $50. So, can I increase my account value by 5 times on one trade!

Commander in Pips: I do not want to upset you, but what if rate falls to 1.32?

Pipruit: In this case I will loose $250... Wait a minute, but I have only $50. It means that I will owe my broker $200, doesn’t it?

Commander in Pips: No, most brokers have automatic software that controls your assets value. When your assets on trading account become too small, your positions will be closed automatically and your loss will not exceed your current assets value – in our case 50$. But due 500:1 leverage it will happen much earlier than 1.32 will be reached. Let’s see: 1.33-50$/25000$ = 1.3280.

Pipruit: Oh, 1.3280 is very close to 1.33! I will loose all my capital in a blink of an eye!

Commander in Pips: Yes, it could happen. This is the reverse of the coin and the dark side of the leverage. You can win so much, but can lose it quickly also. It means that you have to learn advanced asset management and risk control before you start trading. We will talk about this in later chapters.

The FOREX market has other advantages over other markets:

5. Tremendous liquidity of the FOREX market makes available for you the opportunity to buy or sell at will in just a fraction of second. This means that there is almost always someone else on the market that willing to be a counterparty of your trade. And this “someone” will be searched out just in a fraction of a second. In a normal market environment, your orders should be filled pip to pip without any slippage, despite the way you’ve entered them. You may buy or sell at directly by clicking your mouse or can place pending orders that open based on price – there is no difference. It’s amazing - see what $3.98 Billion per day turnover can do!

6. As we has discussed previously, as a rule, there are no commissions on most FOREX transactions – no clearing fees, brokerage fees, exchange fees or something. Most FOREX brokers make money only on the Bid/Ask spread and compensate their own expenditures from it. But, to be absolutely honest, sometimes you can meet with brokers that still apply additional fees. This usually only happens if you trade with micro account value or on an ECN broker that is passing along real market spreads with no markup. The absolute majority of brokers do not have any commissions – only Bid/Ask spread. This leads to next advantage of the FOREX market –

7. Low transaction costs. The difference between Bid quote (the price at which you will sell, if you want) and Ask quote (the price at which you will buy, if you want) now about 0.02-0.05% (2-5 pips) on major pairs and about 0.1% on exotic pairs. And this is even for average accounts with a value of only $500-2000. For larger accounts it could be as low as 0.005-0.01%. The biggest participants can sometimes trade without any spread at all.

8. Huge competition amongst brokers and other providers of trading services leads to free software and free “demo” access to FOREX market. It means that absolute majority of retail brokers provide their clients with free (without any delay in quoting) access to FX market. This access is based on free software that besides quotes per se, usually also includes charting services and news. But there is more to come. Also the majority of brokers let you practice in trading on demo accounts absolutely free.

Pipruit: And what is a demo account?

Commander in Pips: Demo accounts contain virtual money, but the quoting and the process of trading are the same as on a real account using real money. The advantage of demo accounts is in the possibility of adding more money at will or even starting with a fresh account. This lets you practice, learn the trading software, and get necessary confidence for trading.

9. The huge trading turnover on the market leads to the impossibility to totally control and manipulate the market by any entity. Central banks can initiate the strong moves on the market (during so-called interventions), but they can’t hold this influence for an extended period of time. A broker might be able to cheat by a few pips, but the biggest banks in the world can’t force the market to go where they want it to.

10. And the last one – the FOREX market does not have any middlemen, so you can trade directly with the market that is responsible for quoting currency pairs. Although there are intermediate chains between personal brokers and huge banks, we’ve talked about this already. Their quotes should always be very close to each other. From this point of view, there is little or no difference with whom to trade.