Why speculative forex trading has extraordinarily higher returns

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People unfamiliar with investing in currencies or who have not followed the evolution of the foreign exchange industry find it very difficult to accept the fact that one can, through forex trading, pocket returns several times greater than traditional investment portfolios. What these people fail to realise is that advances in telecommunications have greatly increased the pace at which business is done and greatly improved returns compared to what was possible a few years ago in the spot forex market – OTC (Over the Counter Trading).

Now that it is possible to send mail 10,000 kilometres away and receive a reply within a few seconds and repeat the same action several times a day, one should surely think twice before rejecting the possibility for higher returns. The days of waiting weeks for a reply are long gone! If a high street bureau de change, using a manual process, can make small profits many times during an eight hour working day on every currency transaction, imagine how many similar transactions can be done electronically over a 24 hour period.

In his book “All About The Foreign Exchange Market in the United States” Sam Y. Cross says about electronic trading, “Quoted prices change as often as 20 times a minute. It has been estimated that the world’s most active exchange rates can change up to 18,000 times during a single day.” There was a time when this price changed only once in many years. The years became months, then days, then hours and now seconds. These price movements have allowed traders to go in and out of the market at a pace not possible just a few years ago. Active modern day traders can go in and out of the forex market 200 times in a single day and take a small profit each time they perform these trades.

There are other reasons why one should believe in foreign exchange’s potential for high investment returns. The foreign exchange “week” begins at 5am Sydney time on Monday mornings. The foreign exchange trading day almost never ceases except for short periods over weekends. At any given time, somebody somewhere is buying and selling currencies. As one market closes, another market opens. Business hours overlap, and the exchange continues as day becomes night and night becomes day.

It should be noted however that exchange-traded foreign exchange instruments, such as foreign exchange futures and options, adhere to the traditional exchange trading hours.

In forex trading a typical trading day will start in New Zealand and Sydney, followed by Tokyo, Hong Kong and Singapore. These markets are already well into their stride when trading begins in parts of the Middle East. As Tokyo begins to wind down, the European markets open for the day. The late European afternoon sees the start of business in New York, and as the day reaches its end in the United States, it is time for the Western Pacific countries to open their doors once again.

The global nature of this market, its interconnectedness, means that short-term speculators in the foreign exchange market actually have three “trading days” in each 24-hour day. There is roughly a “day” each for the Asian time zone, European time zone and American time zone. Unlike in other markets, currency traders do not have 16 hours to contemplate their next move or the advantages of herd-like behaviour at the open of a market.

While institutions have the capacity to keep a 24 hour- watch of the market, individual day traders cannot do so continuously. They need to sleep.

However, trading forex from Africa has advantages because of the time zone. The continent falls neatly between Asia, Europe and the USA. This means that trading time in Africa is the same as that in Europe and also catches both the end of the Asian trading day and the beginning of the American trading day. This natural resource enables African traders to trade at the best times without having sleepless nights.

Generally, the markets tend to make their biggest moves during the Europe/New York overlap, with New York usually more active in the morning than the afternoon. The largest amount of foreign exchange trading takes place in London, even though the British Pound is less widely traded than some other currencies. In fact, more dollars are traded in London than in New York. However, most of these trades are undertaken by non-UK owned companies based in London, with USA institutions owning the lion’s share.

Seven months ago, I gave this explanation of why forex trading offers higher returns to a Harvard Business School postgraduate and financial researcher. He argued with me endlessly that it is not possible to double one’s income in a few months by buying and selling currencies. He gave me a very long-winded and technical explanation why, simply put, the risk-reward-ratios, investing norms, returns and the investment instruments he studied did not agree with what I was telling him about modern spot forex trading. Last month, he came back and shook my hand vigorously with a very wide smile.

Ian Mvula is the founder of OFT a brokerage dedicated to introducing new retail and institutional investors to investing in managed forex accounts- http://www.forexplatform.com managedfx@forexplatform.com

Why speculative forex trading has extraordinarily higher returns
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About Ian Mvula
Ian Mvula is the founder of OFT a brokerage dedicated to introducing new retail and institutional investors to investing in managed forex accounts- http://www.forexplatform.com managedfx@forexplatform.com WebProNews Writer
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