Online FOREX (Foreign Exchange) trading is becoming increasingly popular around the globe. The increased level of availability through the Web has made it possible for investors to trade currencies from the convenience of their home. Besides, it has become simpler for a growing number of people to learn more about the mechanisms of currency trading due to a large number of resources available. In spite its numerous advantages, online FOREX trading has also shortcomings, mostly related to the reliability of the FOREX broker.
Why Investing In Online FOREX Trading?
Online FOREX trading has unlimited upside potential. FOREX can provide investors with enormous gains relative to capital invested although the risk undertaken is huge. Most of the electronic platforms that are currently available on the Web encompass market-making and risk-management technologies to minimize spread increases and maximize profit potential. Moreover, the FOREX market is so huge that it is impossible to be influenced for own gain.
The most commonly traded currencies are the US Dollar (USD), the EURO (EUR), the Japanese Yen (JPY) and the British Pound ( GBP ) and a series of smaller currencies including the Swiss Franc (CHF), the Australian Dollar ( AUD ), and the Canadian Dollar (CAD). Normally, there are open positions for the major currency pairs which are USD/JPY, USD/CHF, USD/CAD, EUR/USD, EUR/CHF, EUR/ GBP , EUR/JPY, EUR/ AUD , AUD /USD, AUD /JPY, GBP /USD, GBP /JPY, and GBP /CHF.
The Advantages of Online FOREX Trading
a) 24/6 Trading
Online FOREX trading is a 24/6 market (Sunday 5pm EST to Friday 4pm EST ) with unique functional benefits. Investors can trade currencies following the trends of the global markets. If they expect that a particular currency will trade in a certain way, they can take the relevant investment position right away. Because the market is open 24/7 there will be another investor immediately available and willing to take the opposite position and trade the same currency.
b) High Market Liquidity
According to Triennial Central Bank Survey of Foreign Exchange, in April 2010 the global foreign exchange market turnover was $4.0 trillion, increased by 21.2 percent since April 2007 ($3.3 trillion). This huge increase demonstrates the substantial market liquidity of online FOREX trading as well as the huge investment opportunities it creates. Moreover, ever since the market has established a floating rate system, it has assumed huge significance attracting both individual and institutional investors including central banks and mutual funds investment companies.
c) Market Transparency
Foreign exchange market is more transparent than the stock market or the commodity market. This allows investors to understand the driving forces behind currency trading in real time. Any information that drives the economic policy of a country is readily accessible for any investor and can be easily analyzed. Besides, online FOREX trading can be performed through any electronic platform without requiring floor brokers or central exchange. This facilitates the instant execution of orders without delay.
d) Marginal Trading
The structure of online FOREX trading market allows investors to trade on margin. U.S. FOREX margin requirements are currently at a maximum of 1:100 allowing investors to leverage their capital for only 1% of their actual outlay while trading significantly higher amounts. The major advantage of marginal trading is that even if an investor does not predict accurately the future movements of particular currencies, an increase in leverage by small currency movements can lead to greater profit potential, but also greater risk.
e) Low Cost Market
Online stock brokers charge around $30, full service brokers charge $150, while futures brokers charge between $10 and $30 per trade. Online FOREX market is a low cost or no cost market with very low or no transaction fees, where brokers get compensated by the bid/ask spread of each transaction.
How to Check the Reliability of a FOREX Trader
Investors enter a currency position expecting financial gains. FOREX trading requires making quite complex calculations of the upside potential and there are several factors that need to be considered to determine the level of risk an investor is willing to undertake. These factors include, but are not limited to, the volatility of the underlying security; the size of the position; and the market timing.
To avoid scams and determine the reliability of an online FOREX broker, investors need to evaluate the following factors:
a) Convenience of trading
The faster investors receive the signals, the faster they can place their trades on the platform and take their position. This enables them to stay ahead competition most of the times.
b) Customer friendliness
Trading signals are customized to meet the individual customer needs. Most providers offer trading signals for professionals and beginners while others send buy or sell FOREX signal opportunities to mobile phones through specialized forex software. Also, the website should display current rates and current account information. In terms of customer service, brokers should be available 24 hours a day so that customers can contact them at all times. Also, they should be knowledgeable, willing to help and ready to provide the best solution.
c) Regulatory associations
The more regulatory agencies the online FOREX broker is associated with the more credible it is. Only trusted brokers are associated with reputed agencies.
d) Transaction policies
Transaction policies include commissions, margins, currency pairs, trading hours and so on. Each investor should choose the best FOREX broker that meets individual needs based on transaction policies and reputation.
Also, to determine the reliability of an online FOREX broker investors need to ensure that the company 1) is located in the US ; 2) is registered with National Futures Association ; 3) operates successfully over the last fours years; and 4) has no regulatory actions against it. If these factors are met, the FOREX broker is reliable and investors can undertake the risk required. However, even reliable online FOREX broker can go bankrupt. The difference is that these bankruptcies incur significantly lower risk than the market risk incurred from any other type of security.