Forex or FX is simply an abbreviation for foreign exchange. Forex trading involves buying and selling currencies in the foreign exchange market.
Foreign exchange market is the largest and most liquid financial market in the world. It’s a global decentralized market where currencies are traded.
Currencies are traded in pairs, such as EUR/USD (Euro/US Dollar) or GBP/JPY (British Pound/Japanese Yen) or INR/USD (Indian Rupees/US Dollar). When you trade a currency pair, you are simultaneously buying one currency and selling another.
In this article, you will learn about the biggest advantages of Forex trading due to which many traders around the world prefer to trade in foreign exchange market. We have covered unique features that set Forex trading apart from trading in stocks, futures and other markets.
Why traders prefer Forex trading?
Understanding the fundamental concepts, benefits, and risks of Forex trading is essential for anyone looking to participate in this global market.
Forex trading, or trading in the foreign exchange market, is popular among traders for several reasons:
Forex Market is highly liquid
Liquidity in Forex trading refers to the ease with which a trader can buy or sell a currency pair without causing a significant impact on its price.
In a highly liquid market, transactions can be executed quickly and at stable prices, which is crucial for effective trading.
The Forex market is the largest financial market in the world, with a daily trading volume exceeding $6 trillion. This high liquidity means that traders can enter and exit positions with ease and at favorable prices.
High liquidity helps to;
- Reduced Slippage,
- Ease of Entry and Exit, and
- Price Stability
Forex market operates 24-Hours a day
Unlike many other financial markets, the Forex market operates 24 hours a day, five days a week, starting from Sunday evening to Friday evening (in GMT). There is no waiting for the opening bell.
A 24-hours market allows traders to react to global news and economic events in real time, regardless of their time zone.
This continuous operation is due to the global nature of the market, with trading sessions in major financial centers like Tokyo, London, and New York.
Traders get high leverage for trading in Forex market
Forex brokers often offer high leverage.
Leverage in Forex trading allows traders to control a large position in the market with a relatively small amount of capital. This can amplify profits, though it also increases the risk of significant losses.
Traders need to manage their leverage carefully and understand the associated risks.
No commission and Low Transaction Costs
Forex trading typically involves low transaction costs, especially when compared to stock trading.
The primary cost is the spread, which is the difference between the bid and ask prices.
Some brokers also offer commission-free trading.
In the Forex market, you can trade smaller lot sizes based on your capital. This helps traders to adjust their position size based on their risk tolerance and trading strategy.
Diverse Trading Opportunities
The forex market includes a wide range of currency pairs, including major pairs like;
- EUR/USD (Euro/US Dollar),
- USD/JPY (US Dollar/Japanese Yen),
- GBP/USD (British Pound/US Dollar),
- USD/CHF (US Dollar/Swiss Franc),
- AUD/USD (Australian Dollar/US Dollar),
- USD/CAD (US Dollar/Canadian Dollar), and
- NZD/USD (New Zealand Dollar/US Dollar).
Major pairs are known for their high liquidity, low spreads, and less volatility compared to minor pairs. These major currency pairs are the most frequently traded currencies.
Minor Currency Pairs do not include the US Dollar but still feature major currencies. Minor pairs have good liquidity but may have slightly wider spreads than major pairs.
This variety allows traders to explore different trading strategies and opportunities.
Also Read: What is the US dollar index and how to track it?
Forex Market is highly volatile
Volatility in Forex trading refers to the degree of variation in the price of a currency pair over time.
High volatility means that the price of a currency pair can change rapidly within a short period, while low volatility indicates that the price changes more slowly and steadily.
The Forex market can be highly volatile, providing opportunities for substantial profits in short periods. However, this also means that traders need to manage risk carefully.
Following factors impact volatility in Forex market;
- Economic Data Releases
- Central Bank Policies
- Geopolitical Events
- Market Sentiment influenced by news, rumors, and market trends
- Economic and Political Uncertainty
No restrictions on directional trading
In directional trading, the focus is to capitalize on the expected movement of prices in a specific direction, whether upward (bullish) or downward (bearish).
Unlike the stock market, the foreign exchange market does not have any restrictions on directional trading.
Since traders are always either buying or selling a currency according to the state of the market, you can easily go long or sell short depending on your prediction of change in their value.
Because of the high liquidity of currencies, brokers do not charge any transaction fees for such trading that are required in stock markets.
Accessibility to Forex market
Forex trading is accessible to both retail and institutional traders around the world 24/7.
Retail traders are individual investors who trade currencies for personal profit. They access the Forex market through online brokers and trading platforms.
Institutional traders are entities such as banks, hedge funds, asset managers, investment firms, and corporations. They trade large volumes of currency and have significant market influence.
Many online brokers offer platforms with user-friendly interfaces and educational resources, making it easier for individuals to get started.
Also Read: Forex vs stock market: what is the difference?
The Forex market is influenced by a range of global factors, including economic reports, geopolitical events, and central bank policies. This dynamic environment can present a variety of trading opportunities.
Overall, the combination of these factors makes Forex trading an attractive option for many traders, offering the potential for profit along with the flexibility to trade on their own schedules.
Forex trading offers a vast array of opportunities for traders, thanks to its high liquidity, 24-hour operation, and diverse currency pairs.
However, it also involves significant risks, especially when using leverage. By employing effective strategies and risk management practices, traders can navigate the complexities of forex trading and work towards achieving their financial goals.
Also Read: Is Forex trading legal in India?
