Saturday, January 19, 2008
Trading Forex - Why Trade Currencies? (Part 1 Of 2)
Trading Forex - Why Trade Currencies? (Part 1 Of 2) When a person wants to enter trading arena, one of the most important questions is âœWhat should I trade?â. There is an overwhelming choice of financial instruments available for trading; stocks, bonds, futures, commodities, options, mutual funds, ETF s, all kinds of derivatives like swaps and forwards and , of course, currencies or spot Forex. Perhaps it s not a surprise, that majority of people start their trading adventure in stocks. These financial vehicles are relatively familiar to most individuals. They are mentioned in the media every day, newspapers always provide price quotes for them. Most of us own or know somebody who owns stocks. That may be direct holding in brokerage account, or an indirect one, through mutual fund or retirement plan. Taking that under consideration, why should a trader branch out into the Forex markets? Entire books could be (and have been) written on the subject. Reasons can be very diverse and compelling ,but also fairly technical and complex. We are going to focus on a few, most obvious, factors, mentioned here in no particular order. Liquidity- Forex is the most liquid financial market in the world. Period. Published figures vary from source to source, but they all agree that total daily volume is in the neighborhood of 2 TRILION a day. It s really hard to comprehend, but it s more than all other financial markets in the world combined. To give it practical meaning- there is no problem to get in or out of the market no matter what size. There is always somebody on the the other side, counter party to your trade , which might not be a case in a lot of other markets. Long term trends- strength or weakness in a given currency is usually a reflection of a given country s economic health, national policy and fiscal state. These factors don t change overnight. They are in place for a long time, often years, producing extended trends in currencies, which maybe easier to follow than moves in other markets. When you add some knowledge of technical analysis, these long term trend can produce number of potentially profitable trading opportunities. Abundance of information- there is a constant flow of government s economic reports, political developments, trade issues and a plethora of other fundamental data that media is quick to pick up and make available for immediate use. At times it might seem there is too much data, but if fundamental analysis is your thing, there is certainly enough to consider. Around the clock trading- unlike stocks, Forex trading is not limited to set hours of local time where the exchanges are located. It moves around the globe as business day goes from Australia and New Zealand, to Tokyo and rest of Asia, followed by Europe and North America. Just as soon as businesses shut down in USA, they are opening again in the far east. Truly global market place. Diversification- currencies are treated as a separate asset class. While any single cross can be, and sometimes is, correlated to some other instruments, a basket of currency pairs will have a life of it s own, not moving closely in step with other assets. Great way to spread risks or simply diversify ones holding, potentially making some profits while remaining parts of portfolio are non productive. These are but a few and very general reasons why Forex is worth at least taking a look at. In the second part of this article we will focus on some additional and quite specific aspects of trading in spot currency markets. Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex LLC, and a creator of highly effective âœRainbowâ trading system. He specializes in mechanical trading systems as explained on spectrumforex.com Spectrum Forex LLC offers numerous services to individual traders. With questions and comments e-mail him at firstname.lastname@example.org .