What Makes Forex Trading Profitable
Why is Forex traded? And why is there profits to be made exchanging currencies?
A Little bit of Forex History
Forex Trading arose out of necessity – because countries had different currencies and needed some standard way of trading with one another. If a company in Europe had to buy products from Japan, they needed to know how to convert their Euros to Yen.
Depending on this conversion, the company could determine whether it was profitable to buy these products or not. For a long time, the exchange rates between currencies were kept fixed, while countries were recuperating from the effects of the second World War.
Floating Exchange Rate
However, around 30 years ago, 1970, most countries opted for a floating exchange rate. When the exchange rate keeps changing, so do the profit margins. Thus, now, the currency itself became the commodity that could be bought and sold.
The Forex Market
Many things make Forex Trading quite lucrative. For starters, the foreign exchange market is humongous. This means that trading happens in large, huge volumes.
Consider this: Take the example of a small village which has a weekly market fair. Supposing you plan to trade here, what would be the volume of your trading? How much profit would you expect to make? Possibly not so much, depending on the population of the village and those who are selling or buying.
Now compare this scenario to when there’s a marketplace large enough to accommodate all the countries of the world and everything each country produces.
Now imagine your chances of making a profit. That’s the volume of the trading that happens in the forex market. If we are to go by certain statistics, the daily turnover goes up to over $3 trillion. Therefore, there’s fairly enough water for everyone to dip their feet into.
If the sheer volume weren’t enough, this market is also extremely liquid, since it is already in the form of currency or cash. The liquidity of a commodity that can be purchased is a measure of how quickly it can be converted into cash.
Forex Market Liquidity
With the Forex market, cash is all that you’re trading and therefore it becomes extremely liquid. This liquidity is quite important for those who are looking at the Forex market from a short-term point of view or for beginners.
Also, because it is such a large market, any one economy or any one event cannot have a large impact on the entire market. Thus, regardless of how bad things get in one corner of the world, the Forex market is still open for traders to make a profit.
Advantages of Online Trading
Spot FX Trading is also instantaneous, which means you can take advantage of the current exchange rate to make immediate profit.
This is because trading today happens online and the entire system is automated to sell/buy at certain values which you can set.
With online trading, there are many other advantages too:
• You can begin trading at very low amounts – as low as $100. This is referred to as a mini forex account.
• Online brokers provide you with automated software, demo accounts and resource materials.
• You set your own buying/selling margins – there are no middlemen.
• Most online brokers will offer you leverage. We will be discussing leverage later.