The world of online foreign-exchange trading has grown rapidly in recent years, especially here in Australia. As currencies are traded in pairs, the aim is to take advantage of exchange-rate fluctuations and as such there are always trading opportunities; as one currency is going down- the one that it is paired against is simultaneously going up.
The FX market is highly favoured amongst short-term and day-traders due to it’s high liquidity, low trading costs, 24 hour operation and high level of activity (not to be confused with high volatility).
- Key considerations:
- The largest highest liquidity market In the world
- 24-hour trading opportunities from Monday morning to Saturday morning
- Relatively low trading costs
- Considered to be the best trending market in the world
- Can be traded using high leverage- increases risk and reward potential
They key point to understand when trading currencies that they are traded in pairs, for example- the AUD/USD pair. As such; when you buy the AUD/USD pair you are buying AUD while simultaneously selling USD. If the AUD appreciates against the USD then the trade can be closed out for a profit. The reverse applies also. in that if the AUD were to weaken against the USD then a loss would be incurred.
The available leverage (gearing) in FX is the highest of any market this is due to the fact that it has the highest liquidity (turnover) and the fact it trades 24 hours per day 5.5 days per week.
This high leverage has given FX the reputation of being overly risky· and it can be when the leverage is not used properly. However, it’s important to understand that the only reason that a broker offers high leverage is that the high liquidity and 24 hour operation actually translates to the ability to manage risk more effectively.
Additionally. while the FX markets move more actively, their average daily movements (particularly the major pairs) are less than most other markets- they are less volatile. The currency market is regarded as the best trending markets in the world, in other words; once it chooses a direction- it’s more likely to continue in that direction more consistently and for a longer period of time.