Chapter 2
Why is Forex Popular
The Forex markets are the largest – by dollar value of trading volume – and most liquid financial markets in the world. Trading Forex is, indeed, immensely popular.
Forex trading on a wide scale sprang up along with the rise of the internet, which enabled brokers to offer individual retail traders access to this asset class, something that had previously been limited to large institutional traders such as banks and hedge funds.
The internet provided retail traders with easy access to the markets and online trading platforms to facilitate trading.
Forex trading has exploded in popularity since the turn of the century for several reasons, including:
- Easy access: low entry costs
- Leverage
- Continual trading opportunities
- High liquidity: low bid-ask price
- Ease of short selling
Easy access for small traders
One of the main attractions of Forex trading is that it’s an asset class that small traders can easily enter.
You might think that becoming a “currency trader” requires a lot of start-up capital – but it doesn’t.
How is it that Forex trading requires so little capital?
The answer to that question brings us to the second reason why so many people trade the Forex markets…leverage.
The power of leverage
What makes it possible for traders to operate in the Forex markets with just a small amount of trading capital is the unprecedented amount of leverage that’s available in Forex trading – up to 1000:1 leverage in some jurisdictions.
Even some of the most highly-restricted Forex trading – that’s regulated by the EU – offers up to 30:1 leverage.
Using leverage that only requires traders to put up a small margin deposit to take a trading position means that Forex traders can, for instance, buy or sell short five micro-lots with a margin deposit of only about $5.00.
High amounts of leverage translate into magnified returns.
A trader trading standard lot sizes might have to put up 100 times more in margin money, but that’s still a relatively small amount of capital – just $500 to trade five standard lots. Now what would their profit be from a 100-pip move in their favour? – $5,000! ($10 x 100 x 5 lots = $5,000)
That’s a $5,000 profit, from a $500 investment.
But…traders do need to keep in mind that just as it magnifies profits, leverage also magnifies losses in equal measure, and a trader can lose more than their original margin amount put up for the trade.
- Learn more, take our free course: Margin Trading Demystified
- Learn even more, take our free course: Mastering Trading Risk
Opportunities
Another major attraction of Forex trading is the continual opportunities to make trading profits. The currency markets trade 24 hours a day, five days a week, and the markets are actively traded throughout each day.
Forex traders can trade every trading day. The possibility of earning a good day-to-day living attracts many people to the Forex markets. The high volume of trading in the Forex markets makes for a very liquid market where bid-ask spreads are attractively low.
Combined with minimal commission charges, this means Forex trading offers very low transaction costs when compared to other investment instruments.
Trading opportunities in the Forex markets are further amplified by the fact that in Forex trading it is just as easy to sell short as it is to buy long. There are no restrictions on short selling like those in stock trading.
Traders can profit just as easily from falling market prices as from rising market prices.
Read:
A relatively easy market to learn
For traders new to Forex trading, it takes some time to learn how to trade the Forex markets – just like it takes time to learn how to invest in stocks, options, futures, or any other investment vehicle. But the immense popularity of Forex trading has generated a wealth of educational resources.
- Learn more, take our premium course: Trading for Beginners
In summary
There are a lot of factors that make people interested in trading the Forex markets. This includes low capital requirements that make it easy for even the smallest of small traders to get started; a 24-hour market that continually offers new trading opportunities; low transaction costs; ease of selling short; and readily available trading educational resources.
One more advantage Forex trading offers is its relative simplicity as compared to other asset classes.
There are only a handful of major currency pairs that a trader needs to familiarise themselves with. Once they do, picking and choosing among currency pairs to trade is a lot less complicated than, say, choosing investments from among thousands of stocks.
Forex trading offers investors a wealth of advantages and opportunities.
Start learning now
Learn the skills needed to trade the markets on our Trading for Beginners course.
