Why Trade FX?

Reason One - A 24 Hour Market

The Foreign Exchange Market does not close during the business week. It is open from Sunday afternoon all the way through to late Friday night (GMT).

Major financial centres of the world are open at different hours and tend to dominate the FX market at different times:

  • The Asian Session kicks off at 2400 GMT and runs through to around 0900 with trading in financial centres such as Tokyo & Sydney.
  • The European Session starts around 0700 GMT and trades until around 1700 with the bulk of trading taking place in London.
  • The US trading session starts at approximately 1300 GMT and they hand over again to the Asian traders to continue the loop.

In addition to these hours many major corporations, traders and FX brokers worldwide run their operations around the clock.

With a 24 hour market you can trade what you like, when you like.Fit your trading around your lifestyle, rather than your lifestyle fitting around your trading!

 

Reason Two - No Gaps

Most financial markets such as stocks and futures have set open and closing times during the week. There are many variables that can cause prices to move outside of normal trading hours. These variables include:

  • News items relating to the instrument that are released either pre or post-market.
  • The movement that occurs in other major financial centers overnight.
  • Surprise news such as acts of war or terrorism.

These factors can create a price differential between the closing price of a security on any given day, and the opening price the next day, known as a gap. For traders who like to hold positions overnight, gaps increase the risk element as the opening price the next day can on occasion be significantly lower than where they may otherwise have had their stop loss or closed their position.

From a risk management viewpoint, foreign exchange virtually eliminates the risk of overnight gaps. As the market is open 24 hours a day, 5 days a week and has unrivaled liquidity, gaps are virtually non-existent (with the exception of the minutes following major economic news releases). You can sleep better at night knowing that your stop losses will be in effect around the clock. You can then close out position on Friday and enjoy your weekend.

 

Reason Three - Unrivaled Liquidity

Foreign Exchange is the worlds largest financial market.

With trading volume in the trillions, it dwarfs every other market in the world combined!

This liqudity means that trading FX can help to protect individuals against bad fills and slippage.

Slippage refers to unexpected price movements often caused by a lack of liquidity in a security which results in a trade price different to what was expected.

 

Reason Four - Transparency

  • No broker or analyst upgrades.
  • No broker or analyst downgrades.
  • No director buying and selling.
  • No insider trading.

In the FX market all announcements are pre-scheduled meaning that you know months in advance the precise times when major news items are likely to result in large price movements.

 

Reason Five - More Accurate Indicator Readings

Indicators are based on the price action of a security. With markets that are prone to gaps, the indicator reading can become messy and less accurate.

When trading FX, there are virtually no gaps, which generally results in more seamless chart and indicator values.

The FX market is also very technical and by correctly applying even the most basic technical analysis principles such as trends and breakouts with simple indicator readings can result in profitable trades.

Note: At TWP we do not promote nor teach indicator buy and sell signals as valid reasons to enter trading positions. Rather, we use indicators as a guidline for letting us know which side of the market we should be trading on, long (buy side) or short (sell side) though the use of convergence and divergence.

 

Reason Six - Superior Leverage

Leverage refers to how much money a broker will let you trade with over and above the cash that you have deposited in your account.

For example, if a broker offers you 10 times leverage and you have £1000 in your account, this means that you can control up to £10,000 worth of a security. Your broker will lend you the other £9000.

Typical Leverage Allowances:

  • UK Stocks - Many spreadbet and CFD companies allow traders approximately 10 or even 20 times leverage.
  • US Stocks - US traders are usually provided with a maximum of 4 times leverage.
  • Foreign Exchange - Up to 200 times leverage!

FX leverage tends to range between 50 times and up to 200 times leverage is offered by some FX account providers.

Many people perceive this as risky and it certainly can be for those who do not understand correct money management principles. If you do not manage your money properly then you can lose your money very quickly.

If you understand how professionals manage their money to ensure that they, at worst, can only lose a small percentage of their trading capital at any one time, you will be able to benefit from controlling larger FX position sizes while committing smaller amounts of available capital to your trade.