The Small Business Times

Important Aspects of FX Traders for Novices

The FX market is where the actual profits in trading occur, even if one is an individual trader or an investment professional. With more than $5 trillion exchanged daily, it dwarfs both the bond and stock markets combined. To give a perspective, the total daily value of all the stock trading in the world equals just about one hour’s worth of FX trading. 

Retail participation in off-exchange foreign currency (FX) markets has increased dramatically in the past few years. If you are a retail investor considering participating in this market, you need to fully understand the market and some of its unique features. Like many other investments, off-exchange foreign currency trading carries a high level of risk and may not be suitable for all investors.

In fact, you could lose all of your initial investment and may be liable for additional losses. Therefore, you need to understand the risks associated with this product. You should also understand the language of the FX markets before trading in those markets

With so much popularity, novice traders have also started entering the market with the help of online brokerages and platforms. There are quite a several educational resources such as FX trading guides for beginners. However, some important aspects are seldom covered in such trading guides. This article aims to shed light on those aspects. 

Who Are the Major Players in the Global FX Market?

While it may be easy for one to say that the main players in the forex market are retail traders, it is not quite so. In fact, the forex market has one of the biggest numbers of participants found in any market. Not only are there individual traders but big institutions as well. 

Numerous players and entities take part in the global FX market. Commercial and investment banks are the largest groups, followed by national governments around the world. The third group is large international companies that trade up to hundreds of billions of dollars annually.

Individual retail traders are the last group. This group consists of individual FX traders, speculators who trade the FX market seeking trading profits, professional investment fund managers and individual small investors who come with varying levels of skill, knowledge, and resources. 

What Role Does Leverage Play in FX Trading?

Many traders are attracted to the FX market due to the unparalleled leverage they receive.  For the uninitiated, leverage refers to a trader’s ability to hold a market position with only a fractional amount of the market value of the instrument being traded.

It is usually expressed as a ratio, which points out the margin required by a broker to hold a position in the market. Leverage also allows FX traders to utilize a very small part of his/her investment to realise substantial gains. However, leverage is also called “a double-edged sword” as it also magnifies losses. 

How Do Volatility and Liquidity Affect FX Trading?

The FX market is very liquid compared to other markets.  With this amount of liquidity, low-bid ask spreads are possible. It also allows traders s to easily enter and exit trades throughout the trading day.

It is also used as an indication by long-term traders that a particular market is tradable. On the other hand, the advantage of volatility in the FX market makes it possible to have o restrictions on short selling such as those that exist in stock markets. Speculators are attracted to the market because of their wide daily trading range. 

Conclusion

All major currencies now move independently of other currencies, being traded by anyone who wishes. Now, hedge funds, banks, brokerage houses, corporations, and individuals all participate in the foreign exchange market either on a speculative basis, to facilitate transactions, or to hedge against currency risks associated with their core business. 

The FX market has exploded in popularity since retail trading by individual small investors became more readily available around the turn of the century However, the lure of “easy money” from FX trading can be deceptive. The fact is that only a small percentage of traders are consistent winners in the currency trading market. To increase the chances of success, traders have to understand the concept in detail before choosing a reliable FX broker. 

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