The currency market is huge with an estimated USD 3.5 trillion traded every day. This is far larger than both the Stock and Futures markets combined. With this level of turnover, there is always movement in the Forex market, thus creating the opportunity to realise profits even when other markets are stagnant.
Trading the Currency Markets
When an investor trades in Foreign Exchange, they always trade a combination of two currencies. These are referred to as a Forex cross or currency pair. One currency is bought (long) whilst the other is sold (short). The investor is effectively speculating on the prospect of one currency appreciating in value in relation to the other.
Margin Trading Forex
Margin trading allows investors to buy and sell assets that have a greater value than the capital held. Foreign Exchange trading is typically executed on margin accounts.
Margin trading does involve a certain amount of risk. Since a position is being held that exceeds the actual value of the account, a trader can incur substantial losses if the market moves against their position. This strategy therefore requires close monitoring of margin utilisation, i.e. the amount of collateral being used to hold margined positions.
If margin utilisation exceeds collateral available, positions must be closed, reduced, or additional funds must be posted to cover the position.