Trading Forex- Why Trade Currencies? (part
September 1, 2007
Trading Forex- Why Trade Currencies? (part
1 Of 2.)
When a person wants to enter trading arena, one of the most important questions
is What should I trade? . There is an overwhelming choice of financial
instruments available for trading; stocks, bonds, futures, commodities, options,
mutual funds, ETF’s, all kinds of derivatives like swaps and forwards and , of
course, currencies or spot Forex.
Perhaps it’s not a surprise, that majority of people start their trading
adventure in stocks. These financial vehicles are relatively familiar to most
individuals. They are mentioned in the media every day, newspapers always
provide price quotes for them. Most of us own or know somebody who owns stocks.
That may be direct holding in brokerage account, or an indirect one, through
mutual fund or retirement plan.
Taking that under consideration, why should a trader branch out into the Forex
markets? Entire books could be (and have been) written on the subject. Reasons
can be very diverse and compelling ,but also fairly technical and complex. We
are going to focus on a few, most obvious, factors, mentioned here in no
particular order.
Liquidity- Forex is the most liquid financial market in the world. Period.
Published figures vary from source to source, but they all agree that total
daily volume is in the neighborhood of 2 TRILION a day. It’s really hard to
comprehend, but it’s more than all other financial markets in the world
combined. To give it practical meaning- there is no problem to get in or out of
the market no matter what size. There is always somebody on the the other side,
counter party to your trade , which might not be a case in a lot of other
markets.
Long term trends- strength or weakness in a given currency is usually a
reflection of a given country’s economic health, national policy and fiscal
state. These factors don’t change overnight. They are in place for a long time,
often years, producing extended trends in currencies, which maybe easier to
follow than moves in other markets. When you add some knowledge of technical
analysis, these long term trend can produce number of potentially profitable
trading opportunities.
Abundance of information- there is a constant flow of government’s economic
reports, political developments, trade issues and a plethora of other
fundamental data that media is quick to pick up and make available for immediate
use. At times it might seem there is too much data, but if fundamental analysis
is your thing, there is certainly enough to consider.
Around the clock trading- unlike stocks, Forex trading is not limited to set
hours of local time where the exchanges are located. It moves around the globe
as business day goes from Australia and New Zealand, to Tokyo and rest of Asia,
followed by Europe and North America. Just as soon as businesses shut down in
USA, they are opening again in the far east. Truly global market place.
Diversification- currencies are treated as a separate asset class. While any
single cross can be, and sometimes is, correlated to some other instruments, a
basket of currency pairs will have a life of it’s own, not moving closely in
step with other assets. Great way to spread risks or simply diversify ones
holding, potentially making some profits while remaining parts of portfolio are
non productive.
These are but a few and very general reasons why Forex is worth at least taking
a look at. In the second part of this article we will focus on some additional
and quite specific aspects of trading in spot currency markets.
By: Mike P. Kulej
Article Directory: http://www.articledashboard.com
Mike Kulej is a Chief Forex Strategist for Spectrum Forex LLC., and a creator of
highly effective Rainbow trading system. He specializes in mechanical trading
systems as explained on www.spectrumforex.com . Spectrum Forex LLC offers
numerous services to individual traders. With questions and comments e-mail him
at kulej@spectrumforex.com.
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