Trading hands down the largest market in the world. The preliminary report from the Bank of International Settlements (BIS) for April of 2013 has turnover at a record-breaking 5.4 trillion US dollars per day. This figure dwarfs the daily turnover of all the world’s equity markets combined.
What this means for you as a prospective trader is that most markets are highly liquid; currencies can easily be bought and sold in large quantities without prices being substantially affected. This in-turn means increased price stability. Also, the fact that currencies are traded in pairs, their value being determined by one currency’s value in relation to another’s, means that the value of currency pairs tend to stay within a certain established trading range most of the time. This is unlike stock markets which have been known to be vulnerable to all-out crashes in certain conditions.
Markets are open around the clock between Monday and Friday. Each trading day is actually comprised of three trading days rolled into one because the Asian, European, and American markets overlap as they open and close throughout the day. As a result you do not have to wait for markets to open, they are always open, leaving you free to trade whenever you like.
Traders buy, or go long, when they expect a currency pair to rise in value, and sell, or go short, when they expect a currency pair to drop in value. However, since currencies are always quoted in pairs, every position you take involves being long on one currency and short on the other. So when buying EUR/USD, for example, you are long on the first currency in the pair and short on the second. This means that as a trader you are easily able to position yourself in a way that allows you to profit, regardless of the state of the underlying market. This is not the case for all investment vehicles.
Leverage is, of course, a double-edged sword, and we will get into this in further detail later on in the course. Nevertheless the current state of play reflects what traders have been demanding of their brokers, and one of these demands has been for ever-increasing leverage ratios. Compared to other instruments where leverage is limited. It is now commonplace for traders with modest trading account balances to leverage their capital up to 500:1 and command far larger positions than they ever would have been able to in the past. Also, it should be noted that interest is not charged on leverage. This is because, in essence, you are not buying or selling, but rather agreeing to do so at a future date. This means that in leverage is not borrowed capital, which does involve paying interest on the capital used to leverage your positions (more on this later).
One of the criticisms leveled at brokers, is that by offering highly leveraged trading accounts they expose their clients to the risk of losing more than they invested in the first place. This is not so. While using leverage carries with it the risk of exacerbating losses in the same way as it provides the potential of amplifying returns, it is now standard practice for all reputable brokers to offer their clients negative balance protection. What this means is your trading account will never fall below zero. You will receive margin calls if your margin level drops below a certain percentage of your equity, depending on the platform you are trading on. Should it continue to drop your broker will begin automatically closing any open positions you have so as to protect you from incurring losses beyond the capital you have in your account.
The online industry has had to be very technically resourceful in order to address the fact that is an entirely decentralized market, meaning that trades are not made over an exchange. The way traders, brokers and the inter bank network are dispersed across the globe has required the development of advanced trading platforms that can provide traders with up to the second price quotes in a constantly changing environment, and to facilitate transactions between parties that can be separated by entire continents. These technological advances have led traders enjoying better trade execution speeds than almost any other form of online trading. The trading process is as easy as you entering a trade and liquidity providers filling the order, no-matter where you are in the world.
This applies to all trading instruments. The same technologies that have made online trading possible have also made information freely available. Nowadays resources that were once only available to large financial institutions are open to everyone. In addition to this, the speed at which information travels across the globe has meant that a trader monitoring their open positions from home can react just as swiftly as a professional trading from the very thick of it in London, New York, or Tokyo. Knowledge is indeed power, and today’s information technology provides it in abundance. Especially considering how incredibly complex the markets are, and the myriad of influences which they are subject to, both macro and micro-economic, online traders are now better positioned than they have ever been in the past to take advantage of information and use it to manage their capital intelligently.