Chapter 2, Part I. Why FOREX? Page 3

Pipruit: Cool! I can imagine what kind of yield from trading it will give me! If I, for example, will buy 0.25 EUR/USD for 1.33 and sell it for 1.34, then I will get $250 ((1.34-1.33)*100 000 (it’s a standard lot)*0.25) just by using assets as low as $50. So, can I increase my account value by 5 times on one trade!​

Commander in Pips: I do not want to upset you, but what if rate falls to 1.32?

Pipruit: In this case I will lose $250... Wait a minute, but I have only $50. It means that I will owe my broker $200, doesn’t it?​

Commander in Pips: Usually no. Most brokers have automatic software that controls your assets value. When your assets on trading account become too small, your positions will be closed automatically and your loss will not exceed your current assets value – in our case 50$. But due 500:1 leverage it will happen much earlier than 1.32 will be reached. Let’s see: 1.33-50$/25000$ = 1.3280.

Pipruit: Oh, 1.3280 is very close to 1.33! I will lose all my capital in a blink of an eye!​

Commander in Pips: Yes, it could happen. This is the reverse of the coin and the dark side of the leverage. You can win so much, but can lose it quickly also. It means that you have to learn advanced asset management and risk control before you start trading. We will talk about this in later chapters.

The FOREX market has other advantages over other markets:

5. Tremendous liquidity of the FOREX market makes available for you the opportunity to buy or sell at will in just a fraction of second. This means that there is almost always someone else on the market that willing to be a counterparty of your trade. And this “someone” will be searched out just in a fraction of a second. In a normal market environment, your orders should be filled pip to pip without any slippage, despite the way you’ve entered them. You may buy or sell at directly by clicking your mouse or can place pending orders that open based on price – there is no difference. It’s amazing - see what $3.98 Billion per day turnover can do!

6. As we has discussed previously, as a rule, there are no commissions on most FOREX transactions – no clearing fees, brokerage fees, exchange fees or something. Most FOREX brokers make money only on the Bid/Ask spread and compensate their own expenditures from it. But, to be absolutely honest, sometimes you can meet with brokers that still apply additional fees. This usually only happens if you trade with micro account value or on an ECN broker that is passing along real market spreads with no markup. The absolute majority of brokers do not have any commissions – only Bid/Ask spread. This leads to next advantage of the FOREX market –​