Accessibility & Flexibility

Unlike other financial markets, which are limited to the specific trading hours of each country, the Forex market has continuous 24 hour trading, 6 days a week, allowing traders flexibility to chose a time frame which best fits in with their daily lifestyle.

Highly Liquid Market

The key to success is trading highly liquid markets of any sort. This means you are able to instantly enter and exit markets generally at the price you want. Less liquid markets can be highly volatile and unpredictable in which traders can find entry and exits difficult - especially at the price they're looking for; as well if they were a major share holder who needs to liquidate large holdings. Forex is the most liquid market available and therefore has great integrity in its prices specifically because, as mentioned earlier, it is virtually impossible for any individual or company to manipulate the market for any length of time.

Leverage (Margin Trading)

Most everyone is familiar with the excitement and anticipation of going to your local banker with a 5%-20% deposit,hoping to obtain a home loan to purchase your very own piece of real estate. After thorough scrutiny and the divulgence of all your financial information they size you up and gauge your ability to meet repayment obligations over a significant period of your lifetime.

If you have $50,000 to use as a security deposit for a property, and the bank requires a 10% deposit for the particular type and location of the property which you intend to buy, then the property value can be up to $500,000.  (You provide $50,000 and you borrow the remaining $450,000). 

This is called LEVERAGING, and is a powerful strategy that allows investors to control larger valued assets or money with a smaller amount of capital. You can purchase larger assets and you do not need to fund the entire amount, instead you borrow most and pay interest on that borrowed money. Leveraging is utilized by all wealthy people in and out of the financial markets. It is a great way to fast track your wealth creation, but must be used with extreme caution; the potential for the upside is the same for the downside if you don’t manage and minimize your risk properly.

A significant benefit of leverage within the Forex is that the risk is limited, this means you cannot lose more than the balance of your trading account, (which can actually happen with some other trading instruments – some traders of other trading instruments wake up to find they owe more than the money in their trading account – a devastating experience).

Leverage in the Forex market can be lower than 50:1, or as high as 100:1, and even as much as 400:1. This means if you were trading at 100:1 and used $10,000 dollars of your investment capital for a particular trade, then your exposure is a massive $1 million dollars in which you are free to trade the market any way you choose.  The Forex offers much higher leverage than stocks or futures. This holds a huge responsibility for traders to know what they are doing and that they are implementing safe risk and money management strategies.

The Forex is also referred to as ‘Margin Trading’ simply because it can only be traded on a margin. The margin (deposit) is the collateral or security deposit for your leveraged position, which is normally a fraction of the total leveraged exposure. However, the amount of money or margin that you have in your trading account determines the size of the positions you can take. A leverage of 200:1 means you are trading on a 0.5% leverage and you must have 0.5% of the size of that position available as margin within your trading account. (1 divided by 200 equals 0.005 or 0.5%).

Short Trading – Profit from falling prices

This has to be one of the greatest benefits regardless if you are a Forex, Equities, Futures or Derivatives Trader – short trading allows traders to take advantage of falling prices. Trading the market “short” is just as easy as trading long, (although a little harder in the equities market compared to the other instruments mentioned). Profit is simply made from the fluctuations in price - the difference between the opening price and the closing price, therefore a trader can profit from falling prices just as easily as rising prices.

 Trading Long = Profit from rising prices.
 Trading Short = Profit from falling prices.

For example, if an FX trader believed the Euro was to increase against the US Dollar the trader would want to trade the Euro long, so they would BUY into the market. For their position to be profitable the Euro would need to rise. (To close out their position they would need to SELL an equal position; they then they would again be neutral in the market).

However, on the contrary if the trader believed the Euro was going to fall against the US Dollar the trader would want to trade short, so they would SELL into the market. For their position to be profitable the Euro would need to fall. (To close out their position they would need to BUY back an equal position; they then would again be neutral in the market).

When a person has never heard of the concept of short selling most often ‘freak out’ as it is doesn’t fit into the ‘logical’ category – “how can you make a profit when the prices fall?”  Short selling is nothing new, in fact traders have been practicing it for hundreds of years.  Short selling was how Jesse Livermore made his millions short selling the American market in one of its worst share market crashes in 1929 – he was named the greatest ‘Bear Trader’.

The important thing is this: You must be on the right side of the market - you must open up your position to profit from the right direction; if you are trading Long you will not profit if the prices are falling, and vice versa, if you are Short you will not profit if the prices rise. To trade Short and profit from the falling prices, all you have to do is to click on the SELL button rather than the BUY button.

Volatility Intra-Day

Many Forex traders like to intra-day or day-trade the major currencies, as this group regularly have large volatile intra-day movements that traders exploit for exceptional quick profits. Later we will discuss in detail the difference between Day Trading, Intra-Day Trading and Longer Term Momentum Trading, looking at the pros and cons of each. Determining your individual investment style is paramount - something you need to take seriously and not something you are doing for the thrill of it.

Low Spreads

Forex offers extremely lower spreads, even against the equities markets. The spread is the difference between the Bid and the Ask. These are two prices quoted by the Forex Dealer and is how they make their money as no commissions or brokerage are charged. This will also be discussed in more detail in the following pages.

Margin Policy & Margin Calls

The beauty of the Forex market is that the risk is limited and you can never lose more than the money that is in your trading account, so you could never find yourself in a situation where you need to sell a major asset in order to fund a large loss. Most brokers have some sort of limit, like 60% of your trading account where they liquidate all your positions should they not be able to contact you. It's important that you research the best offer before you open your account.
There are various margin ratios that differ depending on the trading platform, trading account, even currency pairs. The ratios are quoted 200:1 (which means a 0.05% margin required for the trade), 100:1 (1%), 50:1 (2%) and so on.

Let's take a look at a few margin calculations

Most FX brokers offer a 1% margin policy. This means traders must always maintain a ratio of 100:1 within their account for their positions to remain open. Otherwise the broker is free to automatically close out all unprofitable trades (some brokers even close out all positions within the account regardless if they are in profit or loss), so make sure you understand what the broker's account Margin Policies are. 

This is a good risk management tool which ensures you can never lose more than what is in your trading account, so your loss is limited. This means of course if you had $10,000 in your trading account you certainly wouldn’t use up the full $10,000 as your 1% margin to trade positions totaling $1 million, because should the positions go quickly against you your balance is very likely to be liquidated should your losses exceed the broker's margin policy limit. 

Therefore, your money management needs to identify and factor in average market movements so that your position is not unnecessarily closed out, (or all your positions whether they are in profit or not, which some market makers do, as previously mentioned).
The trading platform you use should have some sort of warning system that alerts you if your account is coming close to a margin call where your position/s will be closed out. It is important to note: in a fast moving market, there may be little time to warn you, or there may not be sufficient time to warn you at all.
It is your responsibility to ensure that you monitor your account and maintain the brokers’ margin policy.

To avoid your positions being closed out it is important that you:

·        Continuously monitor the status of your account.

·        Always use a stop loss order so that the risk on your position is limited.

·        Initially  you can use a lower leverage that has a higher margin requirement, so as a last attempt to avoid the liquidation of your position you can increase the leverage, decreasing the margin and saving your position.

·        If you are close to a margin call you can close individual positions to reduce the amount of margin used, or part of your positions if your trading platform allows you to

·        Add additional monies to your account, but remember the transfer may arrive too late if the market moves quickly against you.

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