What is forex trading and why does it appeal to retail traders?
Oliver Brett June 11, 2021 10:54 AM
Traders looking for accessibility, flexibility and liquidity are invited to look to the foreign exchange markets for opportunity.
If you’re interested in trading, and have perhaps already started creating a portfolio, it might be the right time to consider the opportunities available in forex trading. The vast scale of the global foreign exchange market provides unmatched liquidity, narrow spreads and offers easy access to traders of every type.
The strong year-on-year growth of the forex market has created a huge community of traders – “scalpers”, day traders, algorithm devotees and those who pin their trades around specific events. And yet there is still so much scope for new online retail traders – people just like you – to get involved in this exciting world. Read on as we outline the four chief reasons why you should consider the opportunities that forex trading provides.
ACCESSIBILITY: First, get to grip with the basicsOne of the really beneficial things about forex is that it can be a little easier to understand than some other trading instruments. For example, options and derivatives require in-depth expertise to understand fully and can be off-putting. When trading in forex for the first time, it is a good idea to develop a clear understanding of the first two key steps:
You’ll also need to appreciate how leverage works, the risks it involves and the importance of margin – the money in your account that acts as a deposit in order to open and maintain a leveraged trading position. But we can explore that in a bit more depth later.
When you open a trade, you are looking at a particular currency pair, let’s say EUR/USD. You are taking a view that either the euro will improve its value against the dollar (in which case you hit BUY), or the dollar will improve its value against the euro (so you SELL). With an account at City Index you have the option of opening a risk-free demo account, and this is strongly advised for first-time traders.
This will allow you to get the feel of our industry-leading platform and see how leverage works. You will have the option of setting “Take Profit” and “Stop Loss” orders that allow you to manage your exposure to the market. And you can do all this without committing a cent of your own money. If you feel you need to learn more about how forex works, our user-friendly educational materials are always on hand. Once you feel confident, you can then open and fund an account in just minutes.
FLEXIBILITY: Discover leverage and benefit from 24-hour trading during market hours
Forex is a truly flexible trading vehicle. For instance, you only require a small starting capital to start trading the market; forex can be suitable for wallets both big and small. At City Index you are required to make a minimum initial deposit of at least $100 of your selected base currency. (In practice, we recommend you deposit at least 2,500 to allow you more flexibility and better risk management when trading your account.)
Leverage is an important aspect of trading. It opens up the prospect of trading larger amounts of currency than you initially deposit. Many traders find that utilizing leverage is extremely useful, though you should be aware of all the inherent risks beforehand. Leverage is usually denoted by a ratio. For example, if your account has a leverage of 30:1 - the maximum leverage available in the UK for major pairs - that means you can trade a position of £30,000 with only £1,000.
It’s also important to understand that equity from your account is set aside by City Index to maintain a leveraged position. This is known as “margin”.
Leveraged trading increases your opportunity to profit but also increases risk. Please note: minimum margin levels are intended to facilitate more efficient trading. However, it is essential that traders maintain the indicated margin requirements for all open positions in order to avoid any unexpected liquidation of trading positions.
A market that’s open all hours
One other major benefit of including forex within your financial portfolio is the round-the-clock nature of the markets: they are open almost all the time, from 10pm GMT on Sunday (9am Monday in Sydney, Australia) until 9pm GMT on Friday (when the market closes in New York). This means you can concentrate on your trades at a time that is convenient for you, from the comfort of your home or office. You don’t have to stay up late or get up early waiting for an exchange to open for business. It also means the markets react to news as soon as it happens around the world so to manage your position it is often wise to set “Take Profit” and “Stop Loss” orders, especially when you are offline.
LIQUIDITY: Sheer market scale means narrow spreads
One of the most attractive aspects of forex is its high liquidity. Indeed, it has grown into the largest and most liquid market in the world. Advances in technology have allowed many people across the world to constantly trade multiple positions with ease.
According to the Swiss-based Bank for International Settlements, trading reached $6.6 trillion per day in April 2019, up from $5.1 trillion three years earlier. The same survey revealed the US dollar to be on one side of 88% of all trades, while more recent figures provided by data supplier FXSSI show EUR/USD to occupy 28% of all trades with USD/JPY, GBP/USD and AUD/USD.There are a number of inherent advantages in a consistently liquid market:
- Traders have the opportunity to get out of positions at an attractive rate and in a timely fashion with minimal costs.
- Narrow spreads mean it is easier to exit a position
- Volatility, while still an appealing factor, is triggered by news events rather than illiquid markets.
However there are also some disadvantages, such as these:
- Highly leveraged trades come with a large amount of risk attached because there is no limit to the amount of movement that can happen in the forex market in a given day.
- While traders sleep, the forex markets remain active. This is why it is so important for traders to be aware how to manage their positions while not actively monitoring price action.
Forex trading always involves buying one currency and selling another; traders are seeking opportunities in a rising or falling market. It tends to be the case, for example, that when stock markets are in a downward phase in the US, the dollar performs well, and vice versa. Please be aware that past performance is not indicative of future results.
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OPPORTUNITY: Learn as you trade and move up the ladder
Many successful forex traders share strategies detailing the hard work that goes into being successful at buying and selling currencies. If you diligently analyze the news and read the charts you minimize the chances of being caught out by nasty surprises. Some traders try to take regular small profits off gains they make in a short space of time, perhaps just a single minute; others prefer a more long-term strategy. You will soon find the strategy that is the right fit for you.
However, even if you have found a strategy that suits your style of trading, it is important to be aware that all traders will make unfavorable trades from time to time. Accepting those losses while gaining more experience about trading is an important part of every trader’s journey.
In the forex market, just as with stocks, traders buying in a rising market are often looking to catch the early stages of a bull market. Conversely, traders selling into a falling market can seek to profit from a bear market. Just as in forex, as in the wider world of trading, the old Wall Street maxim: “Bulls make money, bears make money, pigs get slaughtered,” is worth bearing in mind.
So why do ‘pigs get slaughtered?’
Emotional discipline in forex trading is fundamental: it can help you stay focused and rational. Following a strategy involves precise planning; it is not enough to know simply when to enter the market, you must have an exit plan too.
Even good trading systems end up having bad times. The key is to keep your average losses smaller than your average gains and do not allow your strategy to be impaired by emotional calls.
Finally, we’re all about giving you the tools you need to trade with more confidence. Our charts come with easy-to-use drawing tools and technical indicators. Read our daily analysis on the biggest trading pairs to get a strong grasp of potential price movements, access trading forums on social media and do everything you can to unravel the ins and outs of forex.
Forex trading involves significant risk of loss and is not suitable for all traders.
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