Forex trading is one of the most financially lucrative investment activities in the world. It also is one of the most risky markets to be in with many traders having lost a lot of money in this volatile market.
The Forex currency market was initially established as a means to allow for the free flow conversion of currencies to facilitate international trade. Although that is the fundamental reason for it's existence, most Forex trading that goes on is speculative in nature. That means the most trading is done to profit off the fluctuations in the Forex market and not for end purpose of using that money to buy goods and services in that currency. It is estimated that as much as 70% of trading in the Forex currency market is speculative in nature.
Speculative Forex trading has become one of the highest yielding divisions in most major investment banks, hedge funds and other asset management companies. When Goldman Sachs, one of the largest and wealthiest investment banks in the world announced their first, higher than expected positive earnings after the 2008 financial crisis, they accredited the currency trading division as having brought them back in the black.
Forex Trading Liquidity
One of the benefits of Forex trading is that it's the most liquid financial market in the world with an estimated $3.21 trillion being traded daily. Liquidity is a real and significant issue in trading. Liquidity is basically the concept of how readily and quickly can you convert something to cash. In other words, how easy it is to buy and sell something.
A reality in the financial markets that can be easily overlooked because you're often not in a physical marketplace is that sellers need ready buyers and buyers need willing sellers. This doesn't always happen in some markets or certain sectors.
For example, a blue chip company like General Electric will always have willing buyers and willing sellers to meet on a price. But a small company, say a penny stock, may have willing sellers but no willing buyers at a price point where they can agree to trade. This penny stock we would say have very little liquidity because it is hard to convert it into cash. GE is relatively liquid compared to the penny stocks because you could fairly easily convert it to cash.
Similarly, the Forex currency market is the most liquid in the world because of it's high trading volume. If you have $100,000 USD, you can be virtually 100% sure that you will find a buyer at a given exchange rate in a currency pair.
Risks and Rewards
Forex trading has become a very popular form of playing the markets. Again, roughly 70% of traders in the market are speculators, there just to make a profit. These would include the currency traders that we've already talked about before who are money managers at investment banks and hedge funds.
There are also individual day traders who have entered the Forex market for very distinct reasons. The Forex market has some of the best leveraging opportunities out there. Partly due to the very little regulation there is in the Forex currency market, day traders can take advantage of trading on margin with very high leverages.
The concept of margin trading or leveraging is basically using other people's money to trade. In this case, it is borrowing the Forex brokerage's money to trade, and leveraging can be 100:1 and as high as 200:1. That means if I put $1 into a Forex brokerage account, they will allow me to trade $200 of their money.
The margin trading that Forex currency trading offers is one of the most attractive features of being in this financial market. It also makes it the most risky. This kind of leverage can cause a trader to wipe out his entire trading account with just minor fluctuations.