What is the Off Exchange Retail Foreign Currency Market (FOREX)?

"Foreign Exchange" is defined as the simultaneous buying of one currency and the selling of another currency. The "Foreign Exchange" or Off Exchange Retail Foreign Currency Market (FOREX) is very hot today. The only way to understand why it is popular, in my opinion, is to compare features from those of the stock and commodity markets.

Liquidity
The FOREX or FX market is the most liquid financial market in the world. This high volume ensures two things: better trade execution and prevents market manipulation. So, why haven't you heard of the FOREX market until recently? Until now this market was only accessible by banks and financial institutions.

Market Hours
The FOREX market is open 24 hours a day (except weekends). Opening at 3:00 pm EST on Sunday and closing at 5:00 pm EST on Friday. This allows active traders to choose the times they want to trade. However, you will soon learn in future lessons the best times to trade and why. In comparison, commodities trading hours are variable based on the specific commodity you are trading. The US stock market, including extended hours, is open for trading between 8:30 am EST to 6:30 pm EST only on weekdays.

Leverage
Depending on your FOREX broker, trading goals, and account size, your leverage can range from 50:1 to 400:1. I definitely do not recommend trading with 400:1 leverage! But, we will get into that later. What this means is at 50:1 leverage, $1,000 can control $50,000 in currency (a simplified example using US dollars of course). Leverage varies in the commodities market (riskier due to low liquidity) and can be as high as 4:1 in the stock market. When I opened my stock market account, my broker only gave me 2:1 leverage.

Costs
Transaction costs are an important factor professional traders take into account when formulating their trading strategy. Transaction costs and brokerage fees in the stock and commodities market can eat up all your profits if not managed correctly. In the FOREX market, most brokers do not charge brokerage fees and your only cost is the difference between the buy and sell price of each currency pair. Again, we will get into that later when I show you how to choose a good broker.

Minimum Investment
A FOREX account can be opened for as little as $250. The minimum to open my stock account was $2,500 with most brokers requiring $5,000.

Noise
Have you ever been faced with so many decisions or possible outcomes that it all mashed together into one big confusion. I call this "noise" and it's why a lot of people lose money in the stock market due to "analysis paralysis." The US market alone has over 40,000 stocks and just over 200 commodity markets. The FOREX market, on the other hand, registers 85% of transactions on 7 major currencies. One final thought...trading in any market can be risky. FOREX is no different even with so many advantages. Understanding the risks and how to minimize them is very important. FOREX still requires training, commitment, discipline and patience. Experience is the best teacher. So get moving and continue reading.

Go to The Profitable Traders website to find out more about our trading strategies.