The popularity of trading and transitioning into a financially independent lifestyle is increasing among people of all ages lately. With an increasing number of trading instruments like stocks, futures, crypto, and forex available today, picking the right asset to trade in can be difficult. Given the fact that most people are familiar with exchanging currencies, the advantages of trading forex prove valuable to novices who are unsure of what trading is or whether to engage in it.
With the recession still underway and inflation on the rise, people are constantly trying to maximize what they already have rather than just saving for the future. Among the most popular methods of doing so are forex trading. Forex is the world’s largest trading market, with a daily volume of $6.6 trillion, and it is expected to grow as more and more people seek to profit from their skills and luck.
To be honest, nothing is perfect. In spite of the fact that forex trading can be risky, it can also be profitable, and what’s really compelling for traders are the advantages of trading forex over other investment options. Following a detailed discussion on forex trading, we will discuss each one in turn.
What Exactly Is Forex Trading?
Forex trading involves the practice of speculating on currency prices in order to make profits from their movements. As the name implies, it is simply an act in which you purchase one currency while simultaneously selling another for potential profits. As forex trading primarily involves exchanging currencies, currencies in the forex market are traded in pairs.
A currency pair is a quote for one currency against another; commonly called a quote currency and a base currency. Currency pairs are influenced by both fundamental and technical factors. Among them are economic policies, political stability, trade flows, central bank releases and the supply and demand of goods and services.
The top traded currency pairs are:
- EUR/USD — Euro vs. US dollar
- USD/JPY — US dollar vs. Japanese yen
- GBP/USD — British pound vs. US dollar
- USD/CHF — US dollar vs. Swiss franc
- USD/CAD — US dollar vs. Canadian dollar
- AUD/USD —Australian dollar vs. US dollar
- NZD/USD — New Zealand dollar vs. US dollar
- USD/CNY — US dollar vs. Chinese Yen
- EUR/GBP — Euro vs. British pound
In order to predict the future direction of the foreign exchange market, traders rely on two different types of analysis. Among these are technical analysis and fundamental analysis. Traders can rely on both or one of these factors to predict the direction of the market. Learn how to get started with forex trading with proper market education, practice, application, persistence, and all the underlying principles beforehand.
Advantages of Trading Forex You Should Know
Forex trading appeals to traders of all levels of experience and financial abilities, making it one of the most popular investment options. In spite of the fact that forex trading has become more accessible over the years, understanding the basics is critical when trading forex for the first time. Forex trading offers many advantages over other financial markets. Let’s examine each one in turn.
1. Low Initial Investing Cost
The Forex market is considered to be one of the markets with the lowest trading costs among other investment alternatives. This means that first-time traders looking to invest small amounts can easily enter the forex market without worrying about their finances. Most notably, brokerages like AximTrade allow you to start trading forex for as little as $1. By opening a cent account, novice traders can learn more about forex trading and experience the real market without risking significant funds.
You may wonder if trading with a small Forex account is worthwhile, considering the small profit margins. While it is true that trading with a small forex account can be challenging, it can also be rewarding as it can teach discipline, risk management, and execution skills that are crucial for success in the long run.
Demo accounts are also available to beginners who wish to begin trading forex without losing any capital. The forex demo account is a free trading account backed by virtual money that traders can use to learn how to trade, test their trading strategies, and learn how the brokerage platform works. It is highly beneficial for forex beginners as it enables them to begin free online trading quickly, allowing them to practice trading before investing real money.
Explore the 10 effective ways to grow your small forex account into an account large enough to afford a decent lifestyle.
2. Round the Clock Market Hours
The forex market is a global market that operates 24 hours a day, except on weekends, so it runs 24/5. As a result, Forex trading takes place continuously as long as a market is open somewhere around the world. Forex traders come from various parts of the world, and they participate in the market according to the time zone that they live in.
There are four forex trading sessions: the Sydney session, the Tokyo session, the London session, and the New York session. Trading hours begin in the U.S. when Sydney, Australia, opens at 5 p.m. Sunday, Eastern time. Friday marks the end of trading for the week when the last major market closes in New York at 5 p.m. Forex traders divide the market into three sessions: Asian (Tokyo session), European (London session), and North American (New York session).
If more than one market is open at the same time, there will be more trading activity, resulting in a greater fluctuation in the exchange rate. When the U.S. and London trading sessions overlap (8 a.m. to noon EST), there will always be the most trading activity and the best trading opportunities. Despite being less volatile than the overlap between U.S. and London markets (2 a.m. to 4 a.m.), Sydney and Tokyo trading sessions present excellent opportunities.
3. High Liquidity
Liquidity refers to the ability to convert an asset into cash in a short period of time. Among all trading markets, the forex market has the highest level of liquidity. That means that there are many buyers and sellers out there, who are trying to exchange money at all hours of the day and night.
It is estimated that $6.6 trillion is exchanged every day by individuals, companies, and banks in forex, which is higher than the stock market’s daily volume. While some of the capital is converted for other purposes, most of the activity focuses on making a profit which adds to the advantages of trading forex. Another reason for this is that high liquidity makes transactions quick and easy. As a result of the constant flow of money into and out of the markets, transaction costs (spreads) are typically very low.
A superior liquidity level ensures price stability, which is the most important factor. Since forex is such a large market, there will always be someone willing to buy or sell a currency at the quoted price, so trades and transactions can be conducted anytime. However, it can be tricky to get a good fill during periods of high volatility. There is also the possibility of slippage during periods of instability, just as in any other market.
4. Lower Trading Costs
One of the other advantages of trading forex is that it takes relatively less trading costs than other markets. As it may depend on the broker you choose, most good ones will offer a free trading platform, low spreads, low commissions, free data, micro-lots, and more, so that you can keep more of the money you earn rather than having to pay fees and other expenses.
Amongst the three most important forex trading costs that most novice forex traders encounter are spreads, commissions, and swaps. Failing to consider Forex trading costs can dramatically affect the performance of your portfolio and decrease your potential profit.
AximTrade standard account features the lowest spreads in the market, a minimum of 1 pip on all majors, and 0% commissions. Trading with low spreads allows you to calculate your potential profits and losses more easily, allowing you to develop a more informed trading plan. Here’s how to choose a low spread forex broker and maximize your forex earnings.
5. The Power of Leverage
Trading with leverage is definitely one of the biggest advantages of trading forex, and one should not skip it. Forex leverage allows traders to multiply their investment capacity by borrowing funds thereby increasing potential returns. However, it is important to understand that borrowing money not only increases gains, but also increases risk.
When used intelligently, forex leverage can be a highly valuable tool for beginner traders, as they can use it to their advantage and greatly increase their profits. To open large positions with leverage, you only need an initial margin or a small amount of capital in your account. Forex leverage of 100:1 is common in the foreign exchange market, which means that you can trade with $100 for every $1 on your account. As a result, you can trade 100 times the amount in your account with a leverage ratio of 1:100.
The downside, however, leverage is a double-edged sword, and if a trade goes wrong, a high-leveraged trade can quickly deplete your account. Using leverage to gain an advantage can increase both your gains and losses, so you should be careful when using it. Here’s how to choose the right forex leverage for maximum success on the Forex market.
6. The Ability to go Long/Short
One of the great advantages of trading forex is its ability to go long or short. While going long refers to the act of buying, going short refers to the act of selling that investors and traders use to describe the process of executing a trade. When traders expect the price of an asset to rise in the future, they will “go long” on the asset. Alternatively, they “go short” if they believe the price will drop in the near future. The best part is that forex is fairly easy to trade long or short, which is not the case with many other assets.
For example, someone who goes short on EUR/USD expects the EUR price to fall so that they can buy it at a lower price and profit from it. A loss occurs when one buys low and sells even lower, or when one sells high and buys even higher. Profits and losses can be made in any order, regardless of whether traders buy or sell first.
While the process of going long and short can also be done with stocks, it would require you to take an extra step, and you would have to trade CFDs rather than stocks themselves in order to accomplish this. Cryptocurrencies, commodities, and similar products fall under the same category as well.
7. Nobody owns the Forex Market
Another major feature that adds to the advantages of trading forex is the fact that nobody owns it, which makes it difficult to manipulate. As a matter of fact, even if one of them were to try something like that, the market would adjust itself very quickly and would once again level the playing field for all.
As a result of the open nature of the industry, everyone is aware of the developments, making the forex market transparent. As a result, forex trading is free of the possibility of fraud or corruption. If you need information about currencies, there are online resources available. You can check the latest news and events on any gadget with an internet connection.
In addition, the forex market is decentralized, with no middlemen involved. Trading against other traders is simply a matter of competing against them, without any centralized exchange. It is necessary to use brokers, but they are simply a gateway that allows you to connect with other traders. The forex market is influenced by the economy, and prices fluctuate due to supply and demand, as well as major geopolitical issues.
Take a look at key economic data that influence exchange rates of the forex currency pairs to make better trading decisions.
8. Suitable for all kinds of Traders
Forex trading enables you to achieve both long-term and short-term investment goals. Whether you are a day trader, a scalper, a swing trader or someone interested in long-term investments, the forex market is perfect for everyone. Short-term forex trading has become extremely popular among beginners who are unsure of their ability to manage risk. This type of trading is the most likely to test your agility, focus, and reflexes out of all other types.
On the other hand, the long-term forex trading strategy has proven to be one of the most effective methods of trading for profit in the forex market. Traders who trade short-term make quick profits because they are trading highly fluctuating prices, while long-term traders make steady profits over time. Short-term Forex trading offers higher winning ratios and profitability, while long-term forex trading provides higher compounding effects.
If you are new to forex and wondering what type of trading style will be suitable for you, here’s an article that covers the 4 most popular forex trading styles to help you decide depending on your trading goals, time constraints, and personal preferences.
How to Open a Forex Account in simple steps?
Generally, to open a forex account, you must first choose your forex broker, choose an account type that’s suitable for you, sign up, and then activate your account. Opening a forex trading account these days has become quite simple due to the growth of online trading. Here’s a step-by-step guide on how to open a forex account with a trustable broker for your reference.
While the fintech advancements have made opening a forex account and getting acces to a variety of trading tools much easier, forex trading actually differs greatly from what most people expect if you’re just getting started. There are certainly many factors to consider when opening a forex account and it is a good idea to educate yourself before you begin trading. Here we have outlined the 10 things you should know before you open a forex account. Use these tips to make your trading more successful.