How Profitable Is The Forex Market?

How Profitable Is The Forex Market?Foreign exchange or forex is the largest financial market in the world. People enter the forex market to buy and sell foreign currencies. Traders around the world are constantly valuing and revaluing different currencies against one another. This market operates twenty-four hours a day, six days a week, with a break from Friday night until Sunday afternoon. Forex is almost constantly open due to its global nature. Four trading centers dominate the action in this market: London, Tokyo, New York and Sydney.
London opens early in the morning at 3:00 AM Eastern and closes at noon. New York opens at 8:00 AM Eastern and takes over for London at noon, closing at 5:00 PM, which is the same time that Sydney opens. Sydney closes at 2:00 AM. Tokyo, the final trade center to open after Sydney, opens at 7:00 PM and closes at 4:00AM, one hour after the London market opens.

Market participants can enter the market at any time of the day or night except on Saturdays. These include financial institutions, international corporations, central banks, foreign governments, travelers and tourists. All of them are united by the need to change one currency into another. What is accepted as legal tender in one country is not in all the others. The forex market thus enables international trade and investment between countries as well as speculation for profit.

The demand for currency conversion creates tremendous liquidity and trading volume. The Bank for International Settlements (BIS) conducts a survey of the global forex market every three years. As of April 2010, daily turnover in this market was $3.98 trillion. This astonishingly high number was actually twenty percent higher than the number reported by the 2007 survey. Traders have the ability to make astounding profits in such an environment. Daily movements in different currencies can be quite small, around a few cents in some instances, but using leverage lets traders magnify those movements into huge returns or losses.

Forex has a reputation for unpredictability. With so much money at stake and such big players involved, traders must be prepared for the unexpected. Sudden central bank movements, geopolitical developments or economic crises can send ripples throughout the world, impacting trades involving seemingly disparate currencies. Traders are frequently bankrupted when they are on the wrong side of a trade.

The lure of profits is enough to entice novices and seasoned practitioners alike. There are rules of thumb to follow, such as the Japanese yen carry trade, but they can be destroyed in the wake of events such as the 2011 Japanese earthquake. A carry trade involves simultaneously selling a currency with low interest rates and buying a currency with high interest rates, pocketing the difference.

The forex market offers profits above and beyond that of other asset classes. However, greater than average discipline is required for success. A trader must consider the global context in addition to local events in order to prosper and avoid making catastrophic mistakes.


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