The foreign exchange market or forex is a platform utilized to trade currencies to conduct business and trade with foreign countries. This platform is widely used as it allows businessmen to trade in an international marketplace with the tap of a finger.
So why trade forex? This type of trading has proven to be extremely beneficial for traders across the globe. Lately, the term “Forex” has flooded the internet. It is the talk of the hour. Along with that, it has also piqued the curiosity of several people. Are you one of them? Are you wondering why you should trade forex? If yes, then you are in the right place. Read on to find out all about it and why you should try trading forex.
Forex: An overview
Forex is a short term that people conveniently use to refer to foreign exchange. Often, traders regard it straightforwardly as “FX.” Foreign exchange is currently the world’s largest financial market. A key characteristic of forex is that you can trade any currency in the world in this marketplace.
There is a multitude of benefits that come with forex trading. These benefits are sure-shot incentives for you to try your hand at forex trading as well. The most significant, undeniable benefit comes in the form of versatility and convenience.
Would you like to know more about the advantages of forex trading? There is a considerable number of spheres where forex has the edge over stocks and futures too. Take a look below to find out all you need to know about why you should trade forex.
Let’s take a look at the advantages of forex trading.
Why trade forex: Advantages of trading forex
If you choose to take up the mantle of a forex trader, you will experience the many advantages of foreign exchange trading. Trading forex can serve you with a lot of benefits. These include but are not limited to convenient market hours, high liquidity, and volatility.
Highly convenient market hours
What could be better than a market that is open twenty-four hours and five days a week? The foreign exchange market allows you to trade forex from 9 pm every Sunday to 10 pm every Friday. These are in accordance with GMT.
Forex owes these long working hours to the fact that all parties complete transactions directly, over the counter (OTC). There is no central exchange necessary. Forex is a truly global market. Therefore, you can reap the benefits of varying active trading sessions and their hours of trading.
One factor that you must take into account is that the opening hour of the market will have variations in October, November, March, and April. It is because some countries move to daylight savings on unalike days.
High liquidity
If you have doubts about which the most liquid market in the world is, then you can stop your speculations at forex. It is a market with the highest liquidity in the world. You can find an immense number of sellers as well as buyers out for a trade at all times.
You might be pleasantly surprised to know that every single day, individuals, companies, and banks convert over 5 trillion dollars of currency. Most of the transactions are focused on generating profits.
With the high liquidity of the forex market comes a quick transaction speed and unrivalled ease. Often, the costs or spreads of transactions are incredibly low. It has the added benefit of allowing traders to pass speculations on the movements of the price.
Volatility of forex
Did you know that the bulk of trades in currency every single day is so high it renders into billions of dollars in mere sixty seconds? It makes the movements of the price of certain currencies incredibly volatile.
You have an excellent scope of creating profits if you can successfully speculate the movement of prices either way. Bear in mind that this enormous benefit comes with equal risk. You must protect yourself and set limits on your exposure via effective risk-management instruments.
Versatility: You can trade a multitude of currency pairs
There is no other market out there that can offer you the ability to trade in such a vast range of pairs of currency. Based on speculations revolving around global events and the comparative vigour of major and smaller economies, forex lets you trade whatever you want.
Forex trading presents you with an unmatched myriad of currency combinations. For instance, you can trade major pairs such as USD/GBP, EUR/USD, and more. You can also trade pairs of emerging currencies like EUR/RUB. Other ‘exotic’ duos such as EUR/CZK are also at your disposal.
Forex allows you to hedge
Have you heard of hedging before? If not, read on to find out. Hedging is a practice that you can employ in order to minimize the risks of undesirable moves in the market. You can do this by opening numerous strategically advantageous positions.
Hedging in the forex market is a beneficial method of limiting your losses to a degree you are confident you can manage. You can also use forex to hedge versus losses in an assortment of marketplaces, for instance- commodities.
Leverage in forex
Many forex trading platforms offer you ways to trade pairs of foreign exchange using CFDs. CFDs are leveraged, which opens paths for you to boost your money. By directly paying merely a small fraction of the total value of a position, you can open it on the currency market via leveraging.
Trading in this manner lets you have the opportunity to generate a considerable amount of profits. You achieve this by indulging in a smaller investment.
One thing you should never forget is that some benefits, such as this one, are double-edged swords. It means that you may rack up losses in a significant amount as well.
Does forex trading take place on the weekends?
While you read about the forex market working five days a week, you should know that forex trading does occur even during weekends. It is closed only to retail traders, with the exception of central banks and organizations that are related to them.
There can be a variation in price in the period- lying between the closing on Friday and the opening on Sunday. Traders refer to it as a ‘Gap.’ You must be on your toes during this weekend time and change up your positions following the differences.
Why Trade Forex: Forex vs. Stocks
Choosing between forex and stocks largely depends on the individual’s goals and their style as a trader. They both utilize short-term changes in the process to yield profits and rely on thorough technical analysis to discover and predict price movements. While these types of trading have certain common elements, their functioning varies widely.
Let’s take a look at some of the glaring differences between these trades.
Regulation
The most obvious difference between stock trading and forex trading is that they are regulated by different bodies within the US. The Securities and Exchange, a government agency, is responsible for overseeing the equities and stock trading while the Commodities Future Trading Commission is in charge of forex trading.
Additionally, a non-profit organization called the National Futures Association works along with the government to ensure that traders and investors are protected from fraudulent brokers. Since forex is overlooked by two regulatory bodies, it is more secure to use than stock trading.
Leverage
Leverage is overwhelming more in forex trading when compared to stocks trading, and this makes the forex market supremely lucrative yet incredibly risky. To demonstrate the vast difference between the amounts of leverage of both types of trading, let’s take a look at the numbers.
Forex trading in the US operates at a leverage of 50:1, while a contrasting 2:1 leverage is common in the stock market. This implies that traders indulging in forex trade are required to have merely 2% of the foreign currency value they are trading in their brokerage account. On the contrary, traders in the stock market require 50% of the cost of stocks they are trading in their accounts as cash.
Trading hours
While forex trading is available and conducted for 24 hours every day, stock trading occurs in a limited period, usually during weekdays. Since forex trading does not require a central marketplace with a physical location, it is easier to carry out at any time. This is convenient as all forex trades occur through electronic communications networks across the globe.
This is essential as foreign currencies are constantly in demand around the world at all times. Stocks, on the other hand, are not in demand after business hours of the countries in which the companies underlying these stocks are held. The lack of demand does not compel the stock market to stay open past business hours.
Volatility
The stock market is known for being more volatile than forex markets. This is because foreign currencies are relatively stable concerning one another when the conditions of the economy are steady.
However, in some cases, the volatility of the forex market is very extreme during certain periods that tend to coincide with the volatility prevalent in national stock markets. This can potentially increase the margin of profit.
Market size
Even though stocks can be traded around the world, the equities market is usually limited to national boundaries rather than being international. On the other hand, forex trading is operational in a global market. This is the case because this market is available and functional 24 hours a day.
While forex markets are active worldwide, with brokers trading across numerous currencies, the stock market is limited to the traders’ operational during working hours on weekdays. However, forex trading dabbles with merely 18 pairs of currencies with high liquidity, while stocks are available in thousands.
Liquidity
As opposed to stocks, forex is highly liquid, and this is a consistent factor. This is the case due to the limited supply of stocks as they are representatives of shares of a company. On the other hand, while currencies are available in a finite amount, they are infinite when it comes to trading.
Blue-chip stocks generally have higher liquidity as they are available in abundance. Penny stocks, on the other hand, have a lesser number of shares available and thereby have low liquidity.
Deciding the right type of trading for you essentially depends on your trading goals as well as your tolerance for risk. While forex trading has more leverage and lesser regulation, it is also both lucrative and risky. Tracking the forex is much easier considering the 18 pairs of currencies, and trading on this platform takes place 24 hours a day.
Why Trade Forex: Forex vs. Futures
Futures or futures contracts are a financial contract that obligates the parties involved to determine a transaction of an asset at a predetermined date and price. Regardless of the fluctuation in market price, this transaction occurs at the fixed date and price.
These underlying assets are inclusive of any financial instruments, such as physical commodities. These are typically used by investors to speculate the direction of a security or financial instrument, used for hedging and trade.
While some aspects of forex and futures are similar, let’s understand the differences to assess which one is most suitable for a trader.
Risk
The most prominent difference between these markets is the level of risk involved. Since forex trading is known to be extremely volatile, there is a higher risk involved while trading. Futures, on the other hand, do quite the opposite as they are designed to mitigate risk in the most efficient way.
Minimizing risk is done by creating a contract whose terms do not change on the basis of fluctuation in market price. The asset is to be sold by the seller at the determined price regardless of the influence of the volatile economy at the time of the sale. Therefore, futures offer a lesser risk than forex trading.
Profit
As we have already mentioned, the forex market has much higher leverage, which can essentially reap higher profits. While futures also yield better profits with higher leverage, this factor varies depending on the market at the time of the transaction.
This reveals that while futures provide more security for future transactions, forex trading is more likely to provide higher profits for traders. The high liquidity and accessibility of the forex market make it more convenient to make better profits.
Transparency
Forex trading does not have a centralized exchange system, which means that market transparency is limited. Although this market functions electronically, a middleman labeled a “dealing desk” can potentially challenge the fairness of the marketplace for all traders.
On the other hand, futures trades are handled by a centralized exchange, meaning that all trades occurring in this marketplace are posted to the public in real-time. This is inclusive of a detailed account of sales information as well as time.
Hedging
Futures are mostly used to hedge the movement of prices of the underlying asset. This prevents losses as a result of price changes that do not work in the trader’s favor. This removes the burden of speculation from the trader and allows the finalizing of a reasonable market price.
Forex markets, on the other hand, require traders to effectively deal with fluctuation of market prices as they are required to buy and sell following the current available price. While this is not as secure as a futures contract, forex trading can potentially work in favor of the trader, depending on the economic conditions.
Contract
Futures are a fixed contract between a buyer and seller, which represent declare inheritance of a particular currency type, a price per unit, and a fixed future date for resolution. These contracts carry specific details and are based on standard size and date on markets of public commodities.
Forex markets, on the other hand, deal with actual currencies that are bought and sold at a price decided by numerous factors that affect the market. Since this type of trading occurs electronically, deals are finalized on the spot, thereby labeling them “spot deals.” These occur in the present as opposed to futures contracts.
As mentioned earlier, an individual trader can decide which type of market to trade in depending on his goals and preferred style of trading. While futures contract and forex trading have their pros and cons, they cater to the specific needs of trades.
For example, if a trader is looking to hedge, futures would be the medium to do so. Meanwhile, if a trader wishes to obtain certain currencies in the present, forex markets can fulfill this requirement. Access to international currencies allows traders from all over the world access to global trade with ease.
Summing up
Forex trade has exponentially grown in popularity considering the electronic mode of trade, 24-hour work timings, and many other features it offers. The foreign exchange market is an ever-changing platform that allows traders to trade across various currencies.
Although there are many trading options, forex trading is convenient and preferred by many traders in international markets. The scope for higher profits is present when it comes to trading with forex.
Get a first-hand experience of forex trading and understand how it can benefit it. You can open a demo trading account at eToro or IC Markets and explore without risking your money.