Why Forex Trading is so Popular?

Forex is different from trading stocks, but the benefits and risks are similar

The Forex markets are quite different from the stock markets largely because the price behavior of the Forex pairs is different and entails abrupt price swings. This means traders should utilize trading methods different from those that are used to trade or select stocks so that traders may fully realize the profit potential Forex offers while still minimizing risk.

Both Forex and stocks, however, are similar in that they develop repeatable price trends that give traders enormous profit opportunities for those traders with strong trading methods, disciplined trading mindsets and sound money management tactics.

One of the reasons Forex has gained in popularity is the concept of Leverage, which allows traders to take Forex positions with a much smaller account size than would be required for trading stocks, and because the margin requirements for Forex are smaller than they are for stocks. This increases the reward ratio for profitable trades, but it also increases the risk.

For example, most brokers offer at least 100:1 leverage, which is more than enough to generate significant profits while maintaining sound risk management. Other brokers will offer up to 400:1 leverage, but the risk reward ratio is not in the trader's favor with this type of leverage.

Leverage, combined with reduced margin requirements and high profit potential are the real driving forces of the expanding Forex trading market.

Just The Basics.....How to Trade Forex

Here's a typical trade scenario:

Let's assume the current bid/ask quote for the EUR/USD is 1.3802/05 and you want to take a long (or Buy) position because you believe the Euro will gain on the Dollar.

We'll also assume that you are only buying 1 Standard Lot.

When you buy this pair, you are actually buying 100,000 Euros for $138,050 US Dollars. Using leverage, at 100:1, you would need to have an initial margin deposit of $1,381 for this trade to take place.

Let us then assume that the Euro indeed gains on the Dollar and trades now at 1.3865/68 and you decide to sell and take your profits. You would sell you 1 Standard Lot at a profit of 60 pips (1.3865-1.3805).

When you sell this pair, you are selling 100,000 Euros for $138,650 US Dollars. Since you bought the 100,000 Euros for $138,050 and sold them for $138,650, you made a cash profit of $600.

If on the other hand the Euro went down to 1.3775/78 and you sold at 1.3775, you would have a loss of 30 pips, or $300. ($138,050-$137,750).

When using margin and leverage, it is imperative that you employ sound risk management rules to ensure that your account equity never falls below margin requirements....if it does, your position will be automatically liquidated and you will sustain a significant loss.