Education overview
Learn general concepts about the Forex (Foreign Exchange) market and become familiar with some of the basics. Begin your journey into Forex to understand how the market operates, the basics of technical and fundamental analysis, and what influences the market.
Margin foreign exchange is a contract between two parties agreeing to exchange the difference in the value of a currency between the time at which the position is opened and closed.
The main advantage of foreign exchange (Forex) is that it is open around the clock 24 hours a day 5 days a week, enabling traders to buy and sell from Sunday night to Friday night and access leverage in order to speculate from global currency flows and news events. Forex is also one of the largest and most liquid markets in the world making it the last of the true arenas where fair market competition and real price discovery exists.
Find out why Forex is the fastest growing market in the world by exploring the advantages below.
24 Hour Market
The Forex market is open 24 hours a day, 5 days a week. Trading starts when major global financial centres around the world open. The market opens in New Zealand on Sunday evening and ends after the market closes in New York on Friday. The greatest liquidity occurs when multiple time zones overlap.
Trade Both Rising and Falling Markets
There are minimal restrictions in the Forex market, when it comes to which direction you can trade. This means that if you believe a currency pair is going to increase in value you can buy it or ‘go long’. Similarly, if you believe the pair is going to decrease in value you could sell it, or ‘go short’.
Leverage
Forex can be traded on leverage. Leverage means a lower initial outlay is required to open a larger position. For example, if you have $1,000 in your trading account and use leverage of 1:30, you would be able to open a position with a value of $30,000 (30 times the amount in your account). It is, however, important to note that although leverage gives traders the ability to open larger positions to maximise potential profits, the potential for loss is equally as large.
Liquidity
One of the main benefits of the Forex CFDs market is that it is one of the most liquid markets in the world. This is also one of the main differentiating factors between the Forex market and other financial markets. The foreign exchange market turns over 5 trillion dollars each day, and this high liquidity means that your assets can be quickly converted to cash without any price discount; making it easy to convert a large sum of money into a foreign currency with little impact on the price.
Low Cost of Trading
The cost per transaction in Forex is less than a tenth of the cost of your average stock trade. This represents a huge saving. It also means a lower investment amount is needed to begin trading Forex CFDs.
Transparency
In some exchange based markets, larger players have been known to move stocks or commodities in order to gain an unfair advantage. Given the deep liquidity in the Forex market, it is almost impossible to interfere with general market forces. This results in a fair and transparent market for all participants.
Accessibility
The amount required to trade Forex CFDs is generally lower than what would be required to trade other financial markets. In addition to this, multiple desktop and mobile trading platforms make it easy to access the Forex markets at any time.
Volatility
Due to the huge daily volumes of the Forex CFDs market there is always volatility. Increased volatility means more access to trading opportunities. You have the ability to pick currency pairs that suit your trading style. For example, AUD or NZD are great currencies to begin trading with as a beginner due to their lower daily range and spread; whereas EUR and USD would be better suited for an advanced trader due to its large daily range and the speed with which it moves.
Disadvantages
You should always consider your risk appetite and investment strategy prior to trading leveraged products. Leverage can work for you, as well as against you - and it can magnify profits as well as losses. In the event of a significant move against you, you may lose more than your initial deposit. Further information regarding the benefits and risks can be found in our Product Disclosure Statement.
Non-Standardised Contract Sizes
Forex CFDs are an over-the-counter market unlike the stock and futures markets. This means Forex CFD traders have flexibility in position sizing and can trade any amount between 0.01 lots (1 micro lot) and 200 lots. This gives traders a greater ability to manage their risk.
CFD stands for ‘Contract for Difference’ and is a contract between two parties agreeing to exchange the difference in the value of a security, instrument, or other asset between the time at which the CFD is opened and the time at which it is closed.
CFDs are extremely versatile products growing in popularity as a short term investment tool. They provide an efficient way of maximising your capital outlay and can help diversify your existing investment portfolio or hedge a position.
Speculate in Both Rising and Falling Markets
CFDs are derivatives based on an underlying instrument. There is no ownership of the underlying asset, however they allow you to participate in the price movement; meaning you can potentially profit in both rising and falling markets. In a rising market you would look to buy a CFD and then sell at a later date - this is called ‘going long’. In a falling market you would look to sell a CFD position first and then buy it back at a later date,closing out the position - this is known as ‘going short’.
Efficient Use of Capital
CFDs are leveraged products that enable traders to increase their exposure to an underlying asset with a small initial outlay. When you open a trade you only need to deposit a small percentage of the position value, and this is known as margin. Your margin will vary depending on the value of your CFD position. Leverage can result in added gains should the market move in your favour. However, it also carries risks and can result in increased losses should your position move against you.
Hedging Other Investments
The ability to ‘go long’ or ‘go short’ with CFDs means that they are a great tool for hedging an existing portfolio. They are a cost effective alternative to selling the portfolio prematurely and can be used to provide ‘insurance’ against adverse price movements. For example, if you have a long-term portfolio that you wish to keep, however you are of the view that there is some short term risk to the value of the portfolio, you could use CFDs to ‘hedge’ your positions. If the value of the portfolio falls, the profit you make on the CFDs will offset the losses in your portfolio.
Flexible Contract Sizes
The contract sizes of CFDs are often less than the typical contract size of the underlying instrument which means you can gain exposure to the price movement of the instrument without a significant deposit. Flexible sizing allows you to tailor your trading according to your risk management criteria.
Access Global Financial Markets
CFDs allow traders access to a wide range of global markets that would otherwise be difficult to access. CFDs make it easy to trade commodities like Gold, Silver and Oil; as well as a variety of global indices without having to trade the futures contract itself.
Disadvantages
You should always consider your risk appetite and investment strategy prior to trading leveraged products. Leverage can work for you as well as against you and can magnify profits as well as losses. In the event of a significant move against you, you may lose more than your initial deposit. It is also important to be aware that you do not own the underlying instrument over which the CFD is based. Further information regarding the benefits and risks of CFD trading can be found in our Product Disclosure Statement.