The forex – foreign exchange- market has had a busy week, with many savvy traders earning decent figures on their currency trades.
The euro and pound are heading for significant gains against the dollar at the end of this week, as the US-led rally in global bonds sent yields down, and with them the dollar, bringing relief even to the embattled Japanese yen.
The Forex market is the world’s largest and most liquid financial market, where currencies are traded globally. Forex trading has grown immensely in popularity, providing individuals with an opportunity to participate in the exciting world of international currency exchange.
What is the Forex market?
The Forex market is a decentralised marketplace where participants buy, sell, exchange, and speculate on the values of various currencies. Unlike traditional stock markets, the forex market operates 24 hours a day, five days a week, due to its global nature.
It involves trading currency pairs, where one currency is exchanged for another, such as the EUR/USD (Euro/US Dollar) or GBP/JPY (British Pound/Japanese Yen). The value of one currency in a pair is expressed in terms of another, and these values fluctuate constantly.
The market consists of various participants, including banks, financial institutions, multinational corporations, governments, and individual retail traders. These participants facilitate currency exchange and speculation, creating a dynamic and highly liquid market.
Pros of individuals trading currencies
First, the Forex market is the most liquid market globally, ensuring that large trading volumes prevent price manipulation. This liquidity leads to quick order execution and minimal price slippage, reducing trading costs.
Second, it’s accessible to individual traders worldwide through online platforms. This convenience allows traders to participate from virtually anywhere with an internet connection.
Third, forex trading offers the opportunity to diversify investment portfolios. Unlike stock trading, which depends on the performance of individual companies, forex traders can profit from both rising and falling markets, increasing diversification options.
Fourth, brokers typically charge minimal or no commissions, earning their profit through the bid-ask spread. This cost structure can be more cost-effective for individual investors compared to traditional stock trading.
Fifth, the currency markets operate 24 hours a day from Monday to Friday, providing flexibility for traders to choose when they want to participate.
Cons of individuals trading currencies
First, it’s highly speculative and carries a significant risk of losing the entire investment. The currency markets can be volatile and unpredictable, especially for inexperienced traders.
Second, the market is decentralised and operates across various international jurisdictions, making it susceptible to fraudulent and unregulated brokers.
Individual investors must exercise caution when selecting a broker. Always go with a company who has a global presence and backed by a larger organisation offering different types of financial services, such as advisory, asset management and fintech.
Third, forex trading can be emotionally taxing, leading to impulsive actions and irrational trading choices. Emotional discipline is crucial to success in forex trading.
Fourth, due to leverage, traders can lose more money than they initially invested. While this can amplify profits, it can also lead to substantial losses, potentially wiping out a trader’s entire account.
George Soros is arguably one of the most famous forex traders in history. He’s known for his successful shorting of the British pound in 1992, a trade that earned him approximately $1 billion in profit in a single day. This event is often referred to as Black Wednesday.
Paul Tudor Jones is another highly successful trader who doesn’t exclusively trade forex but has achieved remarkable success in the currency markets. He is known for his ability to predict and profit from major market events, including the 1987 stock market crash.
Although they’re among the most well-known figures in the forex industry, of course it’s important to remember that trading involves significant risk, and not all traders achieve the level of success of these individuals.
That said, as it becomes easier and easier to use online forex trading platforms, we expect a greater number of individuals will actively enter the currency markets than ever before in coming years. And who knows, maybe some of them might even give Soros and Tudor Jones a run for their dollar/euro/pound/yen?
Nigel Green is deVere CEO and Founder
Also published on Medium.
