Why Is Forex Suddenly So Popular

Tuesday 2 November 2010 Posted by sayamoza
Traditionally, access to this market had been restricted to major corporations, hedge funds, and other institutional investors. Most of the world’s major banks are heavily involved in the foreign exchange market and have been for years. Until recently, the individual trader had no way to access this market, because there was no way to compete with the “big boys” on a level playing field.

In the 1990's, the forex market was finally able to open its doors to retail clientele. Online forex market makers opened the gates (and made fortunes), by breaking huge trading positions into “bite-sized chunks” that individuals could buy and sell.

This means that individuals can now trade alongside the biggest banks in the world and even use the same techniques and strategies that professional traders use. Suddenly, the trading landscape has changed, and traders have a “new” alternative to stock and futures markets.
Why Does The Big Money Trade Forex
The forex market (which goes by many names, including FX, foreign exchange, the global market, and the currency market) may seem like the new kid on the block, but it has been the market of choice for global hedge funds and institutional investors for years. The “big money” has always traded forex, because the huge size of the market allows these traders to enter and exit large trades without creating price distortions and disrupting exchange rates. Yet this market seems brand new to many individual traders, because the barriers to entry that used to keep the little guy out of the forex market have only recently fallen away.

In the past few years, the popularity of forex trading has taken off — and for good reason. The forex market’s daily volume, estimated at about U.S.$1.9 trillion and growing, is unmatched by any trading market in the world.

Forex traders also have the ability to use tremendous leverage, which can be greater than 100:1. Leverage allows a trader to “magnify” his or her trading positions, and also serves to magnify gains and losses. Compare this to a typical stock trading account, which normally has leverage of about 2:1. Because of this superior leverage, the barriers to entry for forex traders are very low. Traders can open accounts with as little as a few hundred dollars.
How Do Traders Make Money In The Forex Market
Currency traders simply attempt to profit from changes in the exchange rate. Because of the tremendous leverage available to forex traders, a very small change in the exchange rate can result in a large profit or loss.

Fortunes can be made or lost quickly in this market; even a move in the exchange rate that is equivalent to a few hundredths of a penny can be magnified into a substantial gain or loss.

Most traders consider themselves members of one of two major categories, Technical traders and fundamental traders. 
  • Technical traders focus on technical analysis, which is the study of charts (historic price action) and indicators, to trade forex. They believe that all of the pertinent information needed to place a trade is contained within the chart.
     
  • Fundamental traders use fundamental analysis, which we can loosely describe as the study of economics (especially interest rates) to trade the forex market. They believe that currencies will eventually become stronger or weaker in response to their underlying economic strength or weakness, and due to changes in interest rates and monetary policy.
    Most individuals are interested in the technical aspects of currency trading and have a tendency to feel intimidated when it comes to fundamental analysis. This is probably because charts are a visual device for pattern recognition, and can be interpreted quickly with experience.

    Meanwhile, economics is a subject that is usually presented in a manner that can best be described as wordy and boring. Hey, there’s a reason why economics is called “the dismal science!”.

    Don’t be intimidated by economics and fundamentals. Generally, the fault is not with the subject, but with the manner of presentation. While this blog primarily deals with the technical strategies and techniques of forex trading, I want to encourage you to think of the technical and fundamental aspects of forex as intertwined. In other words, what you see on the chart (technical) didn’t just appear by chance — it is there for a reason (fundamental).

    Unfortunately, most traders tend to look at technical and fundamental analysis as an either/or proposition, but for now I just want to encourage you to consider that they are not mutually exclusive. We’ll cover this concept in greater detail as we progress through some trading techniques.

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