There are primarily two ways that people look at the forex market these days. They either see forex trading as an extremely risky venture where their investments can be wiped out any moment or they see FX trading as a way to make huge profits.
Both these ways are just the two sides of a single coin. The foreign exchange is risky and profitable mainly because of the volatility forex rates suffer and the kind of liquidity it offers.
While volatility and liquidity are simple concepts for a trader to understand, very few people really delve into them. However, delving into these two properties of the market is crucial because it can give you a more comprehensive view of the market. This would, in turn, boost your efforts to succeed at forex trading.
Size of the Market
There are various ways you can analyse the size of a market. In virtually every way you can think of, the forex market would turn out to be the largest of them all. Moreover, it also happens to be the most liquid market in the world.
Take for example the total value of trade that is attributed to forex trading on a daily basis. Daily foreign exchange trading activity can be estimated to be at a whopping 4 trillion American dollars.
Liquidity means that there is more happening in the foreign exchange than any other market in the world. This, in turn, means that you would get more opportunities to make a killing while trading on the foreign exchange than trading in any other type of market.
Spot trading is a type of forex trading. In spot trading, a contract is entered between a forex trader and a market maker, which will allow the buying and selling prices to be fixed in advance.
From the 4 trillion American dollars that go through the market every day, 1.5 trillion American dollars can be attributed to spot trading. This type of trading adds another dimension to how a forex trader can trade in the market and make money.
Relevance of Volatility
Volatility can be defined as the unpredictability of the forex prices in the market. For most traders, it is something to be afraid of. However, an individual involved in forex trading should think differently.
The volatility of the forex market is what makes forex so lucrative to traders. A forex trader makes money out of price movements. If there are more price movements then the forex trader would get more opportunities to make money.
Activity in the Market
It is likely that you are wondering why forex trading shows so much liquidity. The reason for this is the fact that the forex market is active round the clock. You can trade forex at any time in the day because the market shifts from one centre to another around the globe as time zones move into off business hours.
For instance, the eastern markets of Tokyo and Sydney are first to open but as they close the market shifts to London and then to New York.
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