THE BIGGEST MARKET OF ALL

[Carlo Ferrari]

Recent big moves in the US dollar/British pound and Euro/British pound have highlighted the potential profits that can be made from Forex trading. Currency exchange or forex trading is the worlds largest and most liquid market. On an average day the spot foreign exchange market can see a turnover of up to 10 times the world GDP, which makes the equities market look quite small by comparison. Even a high volume day in the equity markets is likely to be only one tenth of the average day in the forex markets.

Recently forex trading has become far more accessible to the online trader and most brokers now offer a forex trading platform together with equities. In the past forex trading has been the province of the Banks and big Institutions and only a few famous individual investors. Now forex trading can form an integral part of the individual online small investor’s strategy.
One advantage with currencies seems to be their tendency to follow trends more closely and with less overall volatility. Forex traders in general, are led by price action. The more a currency moves in one direction, the more traders will tend to push it further in that direction creating a “juggernaut effect” which is difficult to derail. This results in smoother, less volatile movements within a fairly clearly definded historical band of movement. Take for example the U.S dollar verses the British pound, historically there is a strong likelihood that its trading range of approximately 1.20 to 2.05 will stay intact. Compare this variation over the last 7 years with that of the Nasdaq equity market. 7 years ago the Nasdaq composite index stood at nearly 5,200, just prior to the dot-com bubble crash. 9 months later it was down to under 900, a massive variation in price value over a very short time. The sheer size of the forex market and its inherent liquidity, means such gyrations are far less likely trading currencies. This means that you are more able to ride established trends in the currency markets than with equities. As with equities letting your profits run and cutting your losses short is the ideal way to trade and the secret of success. This is one of the main reasons forex trading should form part of your overall trading strategy. The downside to currencies however, is that the juggernaut effect is generally slow moving so short-term profits tend to be limited in size. Because of these characteristics, forex trading can be an ideal candidate for spreadbetting, as the increased leverage to take a position on a currency’s direction can greatly increase the profits on a short-term play.
There are really 7 major currencies providing the bulk of forex trading. The U.S dollar is at the top of the list with the other majors being the Euro (EUR), the Japanese Yen (JPY), the British Pound (GBP), the Swiss Franc (CHF), the Canadian Dollar (CAN) and the Australian dollar (AUD).
The U.S dollar plays the major role as it is the world’s reserve currency. This means it’s the largest holding of any currency for global central banks and major institutions. It’s estimated that 2/3 of all the foreign exchange reserves in the world are denominated in U.S dollars. U.S dominance in world trade, capital markets, and competitiveness, all contribute to its superpower status and to the dollars role as the worlds reserve currency. Commodities such as oil are invoiced worldwide in U.S dollars. Also, countries must hold dollar reserves in order to trade these raw materials. This means any change in the value of the dollar has major repercussions on the values of commodities and in the value of exchange reserves of central banks around the world.


One other fact that makes currency trading attractive at all times, is the fact that there is always a bull or a bear market operating in some currency somewhere in the world. This gives many opportunities to spot a particular trend for a currency, and as we said before, these trends once established, tend to continue for some time making for a genuine easy profit making opportunity.
Generally speaking, currencies are uncorrealated with equities. This is why currencies can and should be considered as part of a well diversified “global” strategy, and specially now online trading has opened up the currency markets to be accessible to everyone.