How important is the Forex Market? It’s certainly one of the largest financial markets in terms of volume, but just how big is it compared to other financial markets? This article takes a look at five reasons why the Forex Market is the largest financial market of them
all and how its influence will only continue to grow in the future.
1) Open 24 hours
Many stock exchanges around the world are open for certain hours of operation—even as early as 5:30 a.m. and as late as 6 p.m—but forex, on average, operates 24 hours a day, 365 days a year. And with currencies constantly fluctuating in value against one another all around the world, many people can actively trade forex at any hour of any day without worrying about market closings or holidays. In addition to having no specific market opening and closing times, forex trading can happen anytime investors want to trade it. Just look at your iPhone or computer and there’s probably some sort of currency exchange you can make within seconds if you feel like it!
2) Low barriers to entry
The forex trading market, being a decentralized financial system, has very low barriers to entry. Anyone can sign up with any of its many providers and begin trading currencies right away. However, just because it has low barriers to entry doesn’t mean that regulation isn’t a factor in forex markets. Countries often have specific laws regarding which currencies can be traded on their exchange platforms. So although anyone can open an account and start trading on regulated forex markets, they may not be able to trade in certain currencies at all or only under certain conditions. In addition, authorities such as regulators, supervisors, and banks take part in regulating currency pairs through laws and rules that are issued by central banks for each individual country.
3) High leverage
The power of leverage amplifies gains. That’s why traders love it. Leverage magnifies losses, too. The forex trading market offers high leverage, which increases your potential for gains but also poses significant risks. Leverage amplifies capital, which means that even if you invest $100 in a trade that nets $300 in profits, you’ve achieved a 3:1 ratio. Many online forex brokers offer leverage of up to 1:500. Which means if you invest $100 in a trade, it can generate as much as $5,000 in profits. However, leverage can be a double-edged sword, its losses are amplified too if the currency you’ve traded moves in the opposite direction.
4) Excessive liquidity
Trading currency in the forex market with high liquidity makes it easy to find buyers and sellers without impacting price too much. Liquidity also reduces volatility because investors aren’t afraid of losing their investment; they know that there are plenty of buyers and sellers looking to buy or sell at any given time. The forex market has very high liquidity because it can be accessed 24 hours a day, five days a week, for an average of 353 days per year. All markets have periods where trading slows down, but forex trading is active pretty much around-the-clock.
5) Inelastic supply
The supply of foreign exchange in the market is usually highly inelastic—meaning that the rate at which a currency will be exchanged for another has a limited impact on supply. Buyers and sellers can pretty much take or leave the rate of exchange, as demand for goods will remain roughly consistent regardless of fluctuations in price. The exception to that rule are goods that are imported from other countries, as individuals with little influence over monetary policy are more prone to change their spending habits based on fluctuations in exchange rates.
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