It might come as a surprise that foreign exchange is not a ‘relatively’ new means of trading. Currency trading is mentioned in Jewish Talmudic writing and only become more formalised in the 17th century with the establishment of the first forex market in Amsterdam. The creation of this trade market meant currency exchange rates could be more easily and freely traded.
Nowadays, forex is traded more than any other asset class. According to Bank for International Settlement, forex markets averaged USD$5.1 trillion per day in April 2016, a sum that far exceeds the USD$200 billion traded on the stock market each day. In 2018. the Australian forex broker market turned over USD$114.4 billion.
Personal trading only formed a small proportion of these forex trading volumes however it has been growing exponentially since 1996 when online trading platforms first became available. In 2016, retail forex trading made up to 5.5% of the forex market with USD$282 billion of daily trading turnover, a significant increase on the 2% or USD$60 billion per day in 2006.
With growth like this, the retail market looks set to continue to grow the future. We look at some of the reasons why retail forex trading is growing.
Regulatory acceptance, compliance, and legitimacy
Forex trading’s decentralised nature historically meant investors were vulnerable forex fraud from untrustworthy brokers. Nowadays, forex brokers must comply with the regulatory requirements of the country they are trading in. Such regulatory assurance gives retail traders confidence their investments are secure.
The regulation also has the effect of giving legitimacy to forex as an asset class for long term investment.
Faster, more accessible and reliable technology means easy access to trading tools and trading at convenience. Many trading platforms are available that can be accessed anywhere there is an internet connection and mobile, tablet or web browser.
Good brokers are also prioritising best in class technology for best trading experience. Pepperstone’s Edge technology, for example, offers blazing execution speeds thanks to 10 optical fibre cross-connects. Faster execution helps reduce the risk of slippage when trading.
Efforts of online brokers to promote forex
Online forex broking is a competitive business so forex brokers are looking for means convince you to trade through them.
Brokers will promote difference features such as:
- low spreads
- high leverage
- risk management tools
- free forex trading education
- demo accounts
Transparency in spreads
Electronic trading means the elimination of dealing desks. This transparency means traders can save on costs through low spreads set by the market and not have to worry about price manipulation.
No dealing desk brokers such as Pepperstone are motivated to offer low spreads as they earn their profits through volume and lower spreads mean a higher volume of sales.
24 hours a day trading
Unlike other asset classes, you can trade forex 24 hours a day due to its global nature.
The advent of electronic trading means you can trade at any time as there will always be a counterparty willing to trade with you somewhere in the world.
Sign on the process with brokers is straight-forward and you can commence trading with as little as AUD $100.
Some brokers don’t even require a deposit to open an account.
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