When most people think of a financial market, they think of the stock market. The stock market is the most commonly recognized financial market around the world. Each day there is about $75 billion of turnover in the New York Stock Exchange, the world’s largest stock market exchange. The stock market pales in comparison, however, to the world’s largest financial market—the foreign exchange market. Ironically, the foreign-exchange market is both the world’s largest financial market and the world’s least recognized financial market.
Daily turnover in the foreign-exchange (fx) market is a staggering $4 trillion. Average daily turnover in the New York Stock Exchange is between $50 – $75 billion; thus, the average daily turnover in the fx market is 35 times more than the NYSE! In fact, if you were to add up the daily turnover in every major stock exchange around the world—New York, London, Tokyo, Shanghai, Germany, France—the number would still pale in comparison to the average daily turnover in the forex market.
What is the FX Market?
The foreign-exchange market is a loosely connected network of international banks where currencies are exchanged for one another. Thus, it is called the foreign-exchange market. If you have ever traveled outside the United States and converted U.S. Dollars into any other currency, then you have engaged in the forex market. Most of the activity that goes on in the fx market each day, however, is not someone converting currency for the purpose of actually using it in another country. Over 80% of currency exchange each day is done by investors speculating in order to gain money as the currency rate changes.
Why Do Most People Not Know About FX?
Until the late 1990’s, most people could not trade in the fx market. Trading in the fx market was limited to large banks, hedge funds, and very wealthy investors. The reason was simple. The minimum contract size was between $100,000-$1,000,000. This very large minimum contract made it impossible for most people to engage in the forex market. However, in the late 1990’s the advance of both technology and the internet changed things. Online forex brokers began popping up in the United States and around the world, and they allowed investors to trade in the forex market with as little as $1,000 or less in their accounts. Thus, the fx market is still relatively new to the general investing public. Although most investors are still largely unaware of this market, it is still growing at an exponential rate. Growth and volume in the fx market is faster than in any other financial market around the world. Let’s examine why.
Benefits of the FX Market
Leverage
Leverage is a huge reason many investors switch focus from stocks or commodities to focus on the fx market. Most fx brokers offer at least 100:1 leverage, and many brokers outside the United States still offer leverage as high as 400:1. 100:1 leverage means that an investor can control a $100,000 position in the market with as little as $1,000 in his trading account. In the stock market, a trader is generally not able to leverage more than 2:1, so the leverage is much bigger in the fx market. Leverage, of course, is a double-edged sword—it can lead to very quick and dramatic profits, but it can also lead to very quick and large losses as well.
Liquidity
The sheer size of the fx market makes it by far the most liquid market in the world. This tends to offer relatively smooth trends on the higher time frames, and it keeps the market from falling victim to the price manipulation that tends to happen in stocks. The fx market is so large that it is virtually impossible for any single bank or hedge fund or even group of large market players to manipulate market prices for any extended period of time. This makes trading the fx market very attractive for smaller traders since they are somewhat on an even playing field with large players.
24 Hours A Day
Since the fx market is a loosely connected network of international banks around the world, it is open 24 hours a day, 5 days a week. The fx trading week begins Sunday evening around 5 pm est and runs through Friday evening around 5 pm est. The most popular times of the day to trade are during the London trading session, the New York trading session and the Tokyo trading session, although London and New York are clearly the best times of the day to trade.
This ability to trade around the clock is very attractive to many traders who still hold regular jobs and are not able to trade during the day. They can also practice on a forex demo account any time during the day or night.
Low Transaction Costs
Transaction costs in the fx market tend to be significantly lower than transaction costs in other financial markets. This is a major draw for traders as it increases bottom line profits over time.
