The foreign exchange market was not originally the most popular in the world. The reason for this is that the foreign exchange market is primarily accessible to hedge funds, CTA and institutions that operate large assets and have not been welcomed by individual traders due to technical requirements, asset conditions and regulations.
Recently, online brokers have opened the foreign exchange market by providing free charts, real-time news, terminals to personal traders and opportunities to make more profits by utilising leverage. As a result, the foreign exchange market has become more popular and has increased its appeal as an alternative investment asset.
Previously, many traders trading stocks or futures began to trade foreign currencies, and some are only trading currencies. This trend started because the foreign exchange has features that are more attractive than stock investments.
5 Reasons Why Foreign Exchange Is Attractive
1. Markets Open 24 Hours
The foreign exchange market is so popular that it is the ideal market for traders who trade frequently. Thanks to the Internet’s development, traders can trade around the clock and participate in the market throughout the day. This feature helps traders make decisions more flexible when making trading decisions.
Trading in the foreign exchange market begins at 5 p.m. on Sunday in Sydney, Australia (New York Time). The Tokyo market will then be held at 7 p.m. And at 9 p.m., the Singapore and Hongkong markets will be held, followed by Frankfurt at 2 a.m., and the London market at 3 a.m. European markets remain active until 4 a.m., but Asian markets are closing. The U.S. market opens around 8 a.m. in New York City on Monday, when the European market slowly slows down, and the Sydney market opens again at 5 p.m.
The most active time for trading is when each market overlaps. For example, from 2 a.m. to 4 a.m. Eastern time, when Asian and European markets overlap, and from 8 a.m. to 11 a.m., when European and U.S. markets overlap, from 5 p.m. to 9 p.m., when the U.S. and Asian markets overlap. In times of overlapping New York and London markets, all currency pairs are active, but in Asian markets, GBP/JPY and AUD/JPY are usually the most active.
2. Customized leverage
I know that high leverage carries high risks, but only a few traders can boldly resist the opportunity to trade with other people’s money because they are human beings! The foreign exchange market is a market that suits traders by providing them with the highest leverage. Most online brokerage firms offer 100x leverage for general-scale accounts and up to 200x leverage for small budgets.
This is compared to providing 100 times as much leverage to ordinary stock investors and 10 times as much leverage to professional stock traders. This is why many traders are turning to the foreign exchange market.
Leverage in the foreign exchange market requires a margin deposit. It is a different concept from the down payment paid for purchasing shares in the stock market. In the foreign exchange market, the margin can be a contract fulfilment deposit or consignment evidence to bear the loss caused by trading. Therefore, this feature of evidence in the foreign exchange market is handy for short-term day traders who need to increase their assets to earn faster returns.
Leverages can be adjusted to any size that customers want. Therefore, if you are a risk-driven investor who uses only 10-20 times leverage or does not want to use leverage, you can choose as much leverage as you want. However, leverage is a double-edged sword. Thus, trading using leverage too high without proper risk management can lead to large losses.
3. Able to make a profit in Bear Market.
Trading Forex enables a trader to make a profit in both bull and bear markets. Currency trading is always about buying one currency and selling the other, so there is no structural bias in the market. Consequently, potential returns exist equally in markets for upward and downward trends. This is the difference from the stock market. This is because most traders focus on buying instead of selling in the stock market.
4. This market fits well with technical analysts.
For technical analysts, currencies tend to develop into strong trends rather than staying within narrow trends for a long time. More than 80% of the trading volume is speculative, so the market frequently overheats.
Experience in technical analysis can be frequently applied in the foreign exchange market. Traders can more easily identify new trends that allow them to enter or liquidate the position. The most commonly used indicators, such as Fibonacci Reversal, Moving Average, MACD, RSI, Support and Resistance level, have proven useful in many cases.
5. Analyse a nation like stocks.
Currency trading is not difficult for fundamentals traders. This is because the currencies are analyzed like stocks. For example, GDP can be used if a country’s growth rate. By analyzing inventory and production ratios, industrial production and durable goods, order data can be analyzed. If you want to analyze sales figures, you can analyze retail sales data.
It is better to invest in the currency of a country that is in a better economic situation or growing faster than other countries like a stock investment. The currency price is determined by the demand and supply of the currency. The two main variables affecting the demand and supply of money are interest rates and overall economic robustness.
Economic indicators such as GDP, national investment, and trade balance reflect the overall economy’s health, thus causing changes in the currency’s demand and supply. Periodically, vast amounts of economic data are published, some of which are more important than other indicators. Among them, data related to interest rates and trade balance should be closely examined.
If the market is uncertain about interest rates, even small news related to interest rates can directly affect the currency market. In general, if a country raises interest rates, its currency will be stronger than other countries’ currencies. This is because investors move the capital to the country to obtain higher interest rates. However, higher interest rates are generally bad news for the stock market.
Some investors will drain funds from the country’s stock market when interest rates rise, which will soon cause the country’s currency to weaken. There is a common opinion in advance regarding the difficulty of determining which effect would be more dominant, but the impact on changes in interest rates.
The indicators that have the greatest impact on interest rates are PPI(producer price index), CPI(consumer price index), and GDP(gross domestic product). Generally, the timing of changing interest rate levels is known in advance. The rate change occurs at regular meetings of the Bank of England(BOE), the Federal Reserve(FED), the European Central Bank(ECB), the Bank of Japan(BOJ), and each country’s central banks.
The trade balance shows the net difference between a country’s exports and imports over a period of time. When a country’s imports exceed its exports, its trade balance represents a deficit and is considered a bad situation. For example, the dollar’s value will fall due to the outflow of dollars outside the United States, where the U.S. dollar will be sold in exchange for other countries’ currencies to pay for imports. Similarly, if the trade balance indicates an increase in exports, the dollar will flow into the United States, and the dollar value will rise. From the perspective of the national economy, the trade deficit itself is not necessarily bad. But if the deficit is greater than the market’s expectation, it will trigger negative price movements.