The foreign exchange market has become increasingly popular over the past years. Many individual traders across the world enter the market to diversify their portfolio or to earn income. But many people wonder if it’s a transient fad or it’s going to last forever.
Forex is likely going to last. It has so many attractions that make it difficult to ignore. The sheer volume of transactions, the highly diverse trading parties, its benefits for individual traders, and its impact on the global economy make it a long-lasting market.
In this article, we’ll go through what makes Forex a highly-probable long-lasting financial market. We’ll talk about why it’s popular among individual traders and how it has evolved over the years.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is Forex?
Forex is a financial market where traders buy and sell currencies in pairs. The underlying concept is based on the exchange rate, the price of one currency against another.
Traders try to make a profit by predicting the value of a currency against another. If they think a currency gets more value than another, they buy long. If they think a currency loses value relative to another, they buy short. The former scenario releases profits when the price rises, while the latter makes money when the price drops.
The Forex market is decentralized, which means it’s spread worldwide with no central physical location for trading. So, no single institution or entity controls or regulates the market. Trades are over the counter, which means the two traders work directly with each other, without an intermediary, clearinghouse, or a dealer network.
After the end of state control over foreign exchange trade in 1973, modern Forex was born. Retail customers in the United States started to trade currency pairs in 1982. Since then, the Forex market has been growing steadily, and it doesn’t show any signs of stopping.
Why Is Forex Unstoppable?
While it’s difficult to predict what will happen in the future, we can speculate based on the market’s current state. Here’s a list of reasons Forex is probably going to last.
Market Size and Liquidity
Forex ranks first among financial markets in terms of market size. With more than 170 currencies traded, it’s bigger than some of the oldest markets, such as Stocks. Every day, an average of 6.6 trillion dollars gets traded on Forex.
Forex has the highest liquidity among global financial markets, with a total value of 2.4 quadrillion dollars in 2019, up from 1.9 quadrillion dollars in 2016. This considerable rise shows Forex is a promising, ever-growing market.
The market’s high liquidity makes it highly appealing to existing and new traders. A large number of traders and daily transactions translate into easy and quick trades, lower transaction costs, and higher chances for price movement speculations.
Diversity of Trading Options
Easy access to the market enables a wide range of pairs, accounts, lots, and platforms. Besides, online trading has made transactions much easier for traders, leading to more participation by different parties.
In addition to traditional currencies, the Forex market has become ever more dynamic by introducing cryptocurrencies.
Many brokerages accept cryptocurrencies such as bitcoin from traders, who can trade anonymously through a decentralized valuation system.
Forex trading through cryptocurrencies has been so popular that its global market has surpassed 700 billion dollars. These developments can increase the Forex market’s appeal to new traders, and new digital currencies can enter the market, adding to its growth. So, even if government-backed currencies were to die out (which is inconceivable), the exchange of digital currencies would replace them.
Diversity of Applications
The impact of Frex on the global economy goes beyond making a profit for individual traders. It shapes businesses around the world and affects domestic economies.
For example, central banks try to fix and stabilize their national currencies on Forex. They raise or lower their national currency’s value to set specific economic policies. When countries seek to make exports competitive, they weaken their domestic currencies.
Many investment firms use Forex trading to diversify their portfolio and hedge risks in their investments. Although the number of individual investors is growing rapidly, it constitutes a small portion of the participants, which indicates the importance of Forex in the global economy for the big players.
Diversity of Market Participants
The wide variety of participants in this market shows its vast potential for making profits. Here are the key participants:
- National central banks control interest rates, inflation, and their domestic and foreign currency’s supply.
- International companies that engage in business with other countries make up a major part of Forex participants. They need foreign currency to make their trades and pay for the goods and services they purchase.
- Investment managers use the Forex market to obtain currencies they need for their international investments. For example, if an American firm wants to invest in a Japanese company, it needs Yen to buy the company’s stock.
- Retail traders are people who use their own money in the market to trade foreign currencies and make a profit. These traders are growing fast as more and more individuals realize the money-making potential of Forex.
Advantages of Forex Trading Over Other Markets
This highly active market is too appealing for individual trading to ignore. It’s active 24/7 worldwide, and traders can work directly with each other through the OTC (Over The Counter) system.
These features make it highly flexible, allowing entities to trade with others across borders without much transaction costs. Here are some other benefits that make Forex more appealing and likely to last:
Low Entry Barriers
Traders don’t need a lot of investment to enter the market. So, it’s the best option for those who have limited funds.
Plus, getting into the market is easy. Some brokers help newcomers get used to the market by giving them a demo account, which the broker funds with fake money.
The novice traders can start with a minimal amount of $100, signing up for the micro trading account. This way, they have enough time to learn risk and money management skills and get their heads around the market’s nuances. After mastering the skills, the trader can switch to the regular account.
More Straightforward Trading
Although Forex trading requires lots of experience and knowledge, there’s less headache involved in the trade.
For one thing, trades depend on currencies, compared to the overwhelmingly large number of stocks in the stock market. Plus, although 170 currencies exist in Forex, you can only exchange fewer than 20 currency pairs. This way, traders have to choose among far fewer options, so risk and portfolio management get easier.
High-Profit Potential
A high volume of trades is made on the Forex market every day, which means some currencies fluctuate highly. This price volatility creates an exciting environment for traders to predict the currency’s future prices and make big profits. It’s a perfect opportunity for those who have excellent risk management tools and skills to make the most out of this market.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
Forex’s popularity among traders has turned it into the most liquid global market. Its advantages include high liquidity, low-cost trades, and profitability.
It’s a powerful, difficult-to-eradicate market with diverse participants, from central banks to international companies and fund firms. You can easily enter the market, benefit from its different use cases, and trade without a hassle. Also, its wide impacts on the global economy make it a highly reliable market that’s likely to survive well into the future, without slowing down.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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