Why Forex?

Liquidity
The Forex market is the most liquid market in the world. Most speculators focus on trading the highly  liquid Majors where approximately 85% of trading volume occurs. Other currency pairs are less liquid and therefore increases liquidity risk.

Unlike the stock market, where slippage can be a real concern, high liquidity in Forex means that trades will generally be filled at the order price. There are always plenty of buyers and sellers which helps make sure spreads are narrow.

24-Hour Trading
Since the market is almost always open, traders can react to market, economic and political news as it happens, locking in profits, protecting profits and cutting losses. The main trading centers are Sydney, Tokyo, London, Frankfurt and New York. Trading takes place during five overlapping trading sessions starting at 5pm EST Sunday evening and ending on 4:30pm EST Friday.

Leverage - Trading on Margin
 Trading on margin means that a trader can utilize more capital than they have in their account. The volatility of currency pairs is usually less than other markets, such as futures and equities. Since there is less movement, traders leverage their capital to make money on smaller moves. The amount of  margin available in Forex is as high as 1% (100:1 leverage), and generally up to 2% (50:1 leverage). With $5,000 of risk capital, you can trade up to $250,000 at 50:1 and $500,000 at 100:1. Your broker determines the amount of margin available to you. The equity and futures markets allow significantly less leverage, up to 4:1 and 15:1, respectively.

Calculating Margin: Assume a 50:1 ratio. If you were to buy 100,000 AUD at .59, what would be the required margin?

Margin required = $59,000/50 = $1,180

Keep in mind that trading on margin is a double edged sword. You can lose money equally as fast as you make it.  Take a disciplined approach to your trading.

Lower Transaction Costs – Tighter Spreads - No Commissions
Most online Forex brokers do not charge commissions, but instead make money on the dealing spread. The Dealing Spread is difference between the bid and ask quote. The Bid is the price buyers are willing to buy, and the Ask is the price that sellers are willing to sell at any given time. Under normal market conditions the dealing spread would be no more than 5 pips.

New Electronic Communication Networks (ECNs) are now available in Forex. Check with your broker for costs associated with executing through an ECN based execution platform.

What is a Pip?
A pip is the smallest unit of change that a currency pair can move and is equivalent to the concept of a tick for futures and equities. Currencies trade in fractions of a cent, or Euro, or Yen, and so on. If the U.S. dollar is listed first in the currency pair then it is quoted with 2 decimals, whereas, if the U.S. dollar is listed second, the pair is quoted with 4 decimals.

For example, let’s say you buy the EUR/USD, which is quoted with 4 decimals, at .9051 and sell it later at .9062.  The difference would be +11 pips, or .0011. The USD/JPY currency pair, however, is quoted with 2 decimals. If you bought the USD/JPY at 130.61 and it then dropped to 130.31 and you sold it, the difference would be -30 pips, or -.30.  The pip difference would determine your calculation of profit/loss on the trade.

Sam Seiden - Author
Sam brings over 15 years experience of equities, forex, options and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.

Points of interest:
• Chicago Mercantile Exchange Floor
• Author of Market Advisory Letters
• Fund Manager/CTA
• Speaker to Investment Groups, Universities, and Private Seminars
• Contributing Author for Stocks, Futures, and Options Magazine, Active Trader Magazine, and Futures Magazine
• Trading and Investment Conference Speaker