Foreign exchange trading, commonly referred to as forex trading, is the practice of buying and selling currency values with the aim of making a profit. As a global market, forex trading is conducted all over the world, with the largest markets located in major financial centres including New York, London, Tokyo and Hong Kong.
The forex market is vast and consists of numerous entities including banks, financial/business institutions and brolers, all speculating on the movement of currency pairs. It is also becoming increasingly popular with retail and hobbyist traders owing to its accessibility and suitability for beginners.
If you’re interested in forex trading and are considering it as a potential investment, you’ll need to make sure that it’s the right market for your individual circumstances. This article will look at the main benefits of forex trading, hopefully giving you a good idea of whether or not it’s right for you.
5 Main Benefits of Forex Trading
Every trader is likely to cite different reasons to trade forex, and there’s a lot of information out there relating to this particular market. We advise that you reference multiple sources thoroughly before making any final decision on your next steps.
1. It’s a Large and Global Market
When it comes to the benefits of trading forex, its sheer size and scale sit at the top of the list.
2. It’s Good for Beginners
Accessibility is one of the biggest advantages of forex trading. Compared to other markets, it is relatively easy to enter and does not require a large initial investment, explaining its popularity with hobbyist traders.
However, regardless of the amount of capital you put down, successful trading takes knowledge and skill.
3. You Can Trade 24 Hours a Day
The rolling hours of the market are another of the main advantages of forex trading. Foreign exchange takes place over-the-counter (OTC), meaning transactions are made directly between trading parties, facilitated by a forex broker.
Free demo accounts allow you to practice trading forex without risk, essentially providing a ‘try before you buy’ test run. By simulating a live trading environment, demo accounts give you the chance to get used to a trading platform, familiarise yourself with market movements and develop a risk management strategy, all without making any financial commitments.
4. There Are Low Transaction Costs
Not only does the forex market require little capital for entry, but there are also low transaction costs once you’re in. Typically, brokers make money from spreads, which are measured in pips and factored into the price of a currency pair.
Note: Pip stands for ‘point in percentage’ and is the unit of measurement used to show a change in one currency’s value against another.
When a broker offers you a currency pair, they’ll quote a bid (sell) price and an ask (buy) price, the pip difference between the two indicates the spread, the associated value of which you’ll pay the broker for facilitating
5. You Can Benefit From Leverage
Of all the reasons to trade forex, the availability of leverage is perhaps the most appealing as it allows you to open a high position with a relatively small amount of capital.
Most forex brokers permit retail traders to put down a deposit and borrow against this in order to control a much higher stake, similar to placing a deposit down for a mortgage when dealing in property.