Forex trading, also referred to as foreign exchange, is the process of exchanging currencies to potentially make a profit, usually for trading purposes. Online forex trading and the foreign exchange market is a global market, so trading is conducted all around the globe. In fact, the largest markets are located in major financial centres like New York, London, Hong Kong and Tokyo.
Banks, financial institutions, forex brokers, or individual speculators participate in the market, making it the most liquid market worldwide with a huge daily trading volume. Having said that, if you believe that forex is for you, then read on to explore some of the benefits of forex trading.
24-hour trading
As already discussed, forex is traded continuously around the world as long as there is an open market somewhere. People from the U.S start trading when the first big market in Australia opens at 5 p.m. Eastern time on Sunday and stop trading when the last big market closes in New York at 5 p.m. on Friday. Generally, the market is open 24 hours per day, five days a week and CFD trading occurs from 9 p.m. Sunday until 10 p.m. Friday (GMT).
These long trading hours also result from the fact that transactions are completed directly between trading parties, facilitated by brokers in an over the counter marketplace instead of one central location. Forex traders get to benefit from the various active forex trading hours. However, although the market is closed for retail traders over the weekend, it is important to remember that rates keep on changing. This should be taken into account when forming a trading strategy.
Highly liquid market
High liquidity in forex means that there is a huge number of buyers and sellers trading all the time. In fact, there is over $6.6 trillion daily trading volume. Therefore, there is always someone willing to buy or sell. Increased liquidity also means that transactions are quickly and easily completed, and that costs or spreads are usually low.
For instance, currency pairs like the GBP/USD or the EUR/GBP can be easily exchanged with little variation in their value. Although little variance usually equals little profit, if you have a solid trading plan in place, liquidity enables you to trade efficiently with reduced risks.
Use of leverage
Usually, CFDs brokers give retail traders the ability to buy and sell assets in the market using leverage, meaning that they can trade with bigger amounts than what they have initially deposited in their trading accounts. This makes leverage one of the most appealing reasons to trade forex, as it allows opening higher positions with smaller capital.
Leverage is very similar to mortgage for which people place a deposit. Likewise, brokers enable traders to make a deposit and borrow money against it so as to take control of a higher stake. Traders’ available leverage is expressed as a ratio with the most common being 1:30 or 1:50. So taking the 1:50 as an example, it means that for every 1 dollar in your account, you can trade up to 50 dollars.
Keep in mind that while leverage opens up opportunities, it may lead to losses too, so it should always be used carefully.
High volatility in forex
Since the forex market is affected by various external factors such as economic instability, the overall global economy, political events/news, trends or natural disasters, it sometimes becomes extremely volatile. This means that there are major movements in the value of currencies and as a result, there are possibilities to make profit while you speculate on price movements. However, this always comes with great risk as movement can go against you. So, while preparing your trading strategy, adjust it to potential risk.
Volatility and liquidity are related in that liquid currency pairs are usually less volatile.
Low transaction costs
As already discussed under the liquidity section, there are low transaction costs once you are in the forex market. Also, there is a little capital requirement to enter. The transaction cost is usually portrayed in the form of the spread. Brokers charge spreads for facilitating the trade, and these are measured in pips. Pip means point in percentage and is used to show a change in a currency’s value compared to another.
A currency pair has a bid (sell) price and an ask (buy) price. The pip difference of the two is the spread, which is what you will pay the broker. Spreads are often low which is what makes forex trading “cheap”. Nevertheless, always check all associated costs before choosing a forex broker as some of them charge commission or additional fees.
Easily accessible
Another great advantage of the forex market is its accessibility. Unlike other markets, it is quite easy to enter the market and it doesn’t require a lot of initial capital. This makes is very easy for beginner traders to join too as there is no specific expertise required to enter.
Also, forex brokers offer free demo accounts which allow traders to practise without taking any risk. This helps them put their strategies to the test and see what works and what doesn’t. They also get to familiarise themselves with how the market moves and become acquainted with using the best online trading platform for beginner, the MT4.
Final Thoughts
Of course, there are more advantages of trading forex including the ability to go long or short or the fact that you can trade a big variety of currency pairs. Every trader chooses forex for a different reason. What is important here is to stick to whatever suits your trading style and goals.
