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Forex trading, also known as foreign exchange trading, involves the purchase and sale of currency values in order to generate profits. It is a common practice in the financial market.
Forex trading is a worldwide enterprise that takes place everywhere. If you're still asking yourself why should you trade Forex, it's because it offers the potential for profits through the buying and selling of currency. It is a global market that operates without geographical limitations.
The accessibility and beginner-friendly nature of this trading method have made it a popular choice among both retail and hobbyist traders. To start forex trading yourself, check out Prime XBT.
If forex trading piques your interest and you are contemplating it as a potential investment, it is crucial to determine if it is suitable for your particular situation by thoroughly evaluating it.
Why Should You Trade Forex: History of the Forex Market
Have you ever wondered why should you trade Forex? The biggest and most fluid market globally is called Forex, which is also referred to as the foreign exchange market (FX). You can learn more in our article, “Forex trading; what is it?"
The emergence of the Internet led to the inclusion of a retail component in Forex trading, enabling customers to engage in online trading through different platforms.
For many years, the Forex market was operational but exclusively catered to institutional clients. During the late 1990s, Forex became accessible to individual clients, and the initial online brokers for retail customers began their business operations.
The Forex market witnesses a massive trade of trillions of US dollars every day, out of which retail clients account for almost 5% of the total volume. This translates to a daily turnover of around 250 billion US dollars. However, the reason behind the enormous size of the Forex market remains a question.
Many types of businesses, including multinational trade companies, financial institutions, and hedge funds, rely on foreign currencies to conduct their operations. This involves exchanging one currency for another through online platforms, resulting in a significant flow of funds. Essentially, Forex serves as the worldwide marketplace for currency trading.
Why Should You Trade Forex?
Still curious about why should you trade Forex? Traders strive to select the most favorable market for trading that provides them with the highest potential of earning a profit. The forex market is regarded as the ideal choice by numerous traders worldwide due to several reasons, and we will be highlighting the top nine advantages of forex trading.
1. It’s a Large Global Market
The primary advantage of forex trading lies in its massive size and magnitude. As the largest financial market globally, forex sees an average daily exchange of over $4 trillion USD. Currency pairs are bought and sold by traders from all over the world at all times of the day, making it a truly worldwide marketplace with abundant opportunities for profits.
Why should you trade forex? One reason could be that trading offers numerous advantages such as availability, fluidity, instability, technology, and prolonged trading hours due to the extensive range of the market. It is the comprehensive nature of the market that leads to these benefits.
2. It’s Good for Beginners
Have you ever asked why should you trade forex? Forex trading is popular, especially among hobbyist traders, due to its accessibility and ease of entry, as it does not demand a hefty initial investment in contrast to other markets. This gives forex trading a significant advantage.
No matter how much money you invest, trading can only be profitable if you possess the necessary expertise and competence.
Demo accounts, which are free of cost, offer an opportunity to practice forex trading without any risk involved. It is similar to a test run before actually buying the product and is a great tool to use before you start investing actual money.
The demo accounts simulate a live trading environment, enabling the user to get accustomed to the trading platform, understand market trends, and develop a risk management strategy without making any financial investments.
Note that cryptocurrencies work differently, and you may need to research them separately. You can start by learning about deflationary and inflationary cryptocurrencies.
3. Ability to Go Long or Go Short
When it comes to why should you trade forex, short selling is a necessary component since you are always selling one currency in order to buy another. This is distinct from other markets where you can use derivative products to go short. The value of a forex pair represents the amount that one unit of the base currency is equivalent to in the quote currency.
Let’s take the currency pair EUR/USD as an example. EUR is defined as the base currency, while the USD is referred to as the quote currency. When the trading value of EUR/USD is 1.09, it means that one euro is equivalent to 1.09 dollars. If you anticipate that the value of the euro will rise against the dollar, you would purchase the pair (also known as going long).
In case you believe that the dollar will gain more value than the euro, you can sell the pair (short position), and your profit or loss will be determined by the accuracy of your prediction. This implies that there is a chance to make a profit regardless of the direction in which the market moves.
4. 24 Forex Market Hours
Why should you trade forex? The FX market remains operational for 24 hours every day of the week except for weekends. It starts at 5 pm EST on Sundays and concludes at 4 pm EST on Fridays.
The reason for the long hours in forex trading is due to the fact that transactions are conducted directly between parties over the counter instead of through a central exchange. Since forex is a market that operates globally, traders can benefit from various active sessions during forex trading hours.
Throughout each day, there are four significant trading sessions that correspond to the opening hours of banks located in London, New York, Sydney, and Tokyo. These sessions experience a substantial amount of trading activity, particularly when they coincide with one another.
Forex market's opening hours may differ during March, April, October, and November due to countries changing their daylight savings days.
5. Does Forex Trade on Weekends?
The forex market shuts down at 4 pm EST on Friday and remains closed until 5 pm EST on Sunday. Although retail traders cannot participate during this time, central banks and related organizations continue to trade, making it possible for forex trading to occur over the weekend.
A gap, also referred to as the difference in price between Friday's closing and Sunday's opening, can occur.
It is crucial for traders to have a thorough understanding of the forex trading hours during the weekends and adjust their positions accordingly. To avoid the risk of gapping, traders may choose to close their positions on Friday evening or use stop-losses and take-profits to manage this risk.
6. Volatility Creates Trading Opportunity
When it comes to why should you trade forex, is volatility a good thing or a bad thing? With the large number of currency trades that take place each day, the value of some currencies can fluctuate rapidly, resulting in billions of dollars being exchanged every minute.
This volatility presents an opportunity to potentially earn significant profits by predicting and investing in price movements in either direction.
The market's volatility is like a two-sided sword because it can change direction rapidly, which is why should you trade forex by utilizing risk-management techniques to minimize risk exposure.
7. Leverage Can Make Your Money Go Further
When using a trading company for trading foreign exchange pairs, you can have access to leverage that can increase the impact of your investment. This means that you can initiate a position in the currency market by paying only a small fraction of the total value of the position in advance.
It is important to note that leverage can magnify both gains and losses.
To give an instance, when initiating a transaction on USD/GBP, it may necessitate an upfront payment equivalent to only 2% of the entire amount of the trade. This deposit made initially is known as margin.
When you trade on margin, the profit or loss you earn is based on the total value of the position when it is closed. This means that even with a small investment, you can potentially make significant profits.
The use of leverage in forex trading can increase losses, causing them to surpass the initial deposit. It is crucial to evaluate the overall value of the leveraged forex position before engaging in trading to avoid such risks.
8. Trade a Wide Range of Currency Pairs
Why should you trade Forex? Through forex trading, you can engage in the trading of numerous currency pairs while making assumptions about global events and the performance of major and minor economies. Many currency trading platforms offer more than 80 currency pairs to choose from. Some examples of these pairs include:
- Major currency pairs, like EUR/USD, GBP/USD, and USD/JPY
- Minor pairs, like SGB/JPY, USD/ZAR, CAD/CHF
- Exotic pairs, like USD/MXN, EUR/CZK, TRY/JPY,
- Emerging currency pairs, like AUD/CNH, USD/CNH, and EUR/RUB.
9. Hedge With Forex
Why should you trade Forex with hedging? One can use hedging as a method to lessen the impact of unfavorable fluctuations in the forex market by initiating multiple strategic positions. While unpredictability is a fundamental aspect of forex that adds to its thrill, hedging can be an effective approach to minimize or confine loss to a predetermined extent.
When it comes to hedging forex, there exists a range of tactics to employ, with one of the frequently used methods being hedging using several currency pairs.
To decrease your potential losses in forex trading, you can select forex pairs that have a positive correlation, like EUR/USD and GBP/USD, but open positions in opposite directions. This means that if you experience a loss on a short EUR/USD trade, you can offset it by taking a long position on GBP/USD.
10. Access Tools to Help You Trade
Why should you trade forex? There are various trading platforms for web, mobile, and tablet devices, along with specific platforms for advanced traders. These platforms offer a variety of features to enhance trading, such as tools for risk management, interactive charts, and news feeds. Good platforms like CMC Markets can provide the information you need.
Why Should You Trade Forex Instead of Stocks?
When deciding why should you trade forex or stocks on leverage, it is important to consider which asset you are interested in trading, whether it be currencies or shares. Nonetheless, some traders may opt for forex trading over stock trading due to several reasons:
- Higher liquidity: On a daily basis, the foreign exchange market has an average turnover of $5 trillion, which is significantly higher than the number of traders seen in the stock market.
- Greater volatility: Compared to the forex market, the stock market is known for its relatively steady pricing trends that evolve gradually over an extended period. While this aspect can be advantageous for certain trading methodologies, forex's high volatility can offer dynamic possibilities for traders who operate in shorter timeframes.
- Market operating hours: Unlike the stock market, which operates within specified hours, the forex market remains accessible round the clock.
When trying to determine which is more suitable for you, forex or the stock market, it's important to take into account your individual approach to risk as well as your financial objectives.
Why Should You Trade Forex: FAQs
In our research into why should you trade forex, we’ve also uncovered similar frequently asked questions. Here are these questions with their answers:
What Is the Benefit of Forex Trading for the Economy?
The interdependence of currency prices can provide valuable information about a country's economic condition. By trading currencies, countries can improve their exchange rates and demonstrate economic strength. It is important to consider currency prices as an indicator of a country's overall economic health.
What Are the Benefits of Forex Trading Over Traditional Business?
Online trading enables you to trade on global markets 24/7, regardless of your location, as you have access to their opening and closing times. This means that you can make trades anytime, anywhere. The best forex trading platform can help you make smart trades wherever you are.
How Can I Manage My Risk in Forex Trading?
Despite the advantages that come with forex trading, there is a higher level of risk due to the unstable market and the use of leveraged trading tools. Nonetheless, there are several methods to handle currency risk, including placing stops and limits on your position, creating price alerts, and utilizing a trading approach that aligns with your risk tolerance.
What Instruments Can I Trade Forex With?
Trading via a forex broker in "rolling spot forex" eliminates the need to actually own or receive foreign currency in order to predict the future direction of a currency pair's price. The best desktop forex trading platforms can help connect you with a broker if you want.
What Is the Easiest Forex Pair to Trade for Beginners?
Each trader's risk tolerance and personal preferences will determine which currency pair is most suited to their trading style. For novice traders, it is recommended to begin trading with major forex pairs that have high trading volumes, as they are more liquid and have lower chances of being unstable.
What Are the Most Traded Currency Pairs?
The major currency pairs, which include EUR/USD, USD/JPY, GBP/USD, and USD/CHF, are the most frequently traded in the forex market. As a beginner trader, it's crucial to know that most forex trading occurs in these pairs due to their higher liquidity, making them simpler to trade.
How Much Does It Cost to Start Trading Forex?
When it comes to trading forex, the cost is determined by the currency pairs that you decide to buy or sell. Certain currency trading platforms offer trading forex on margin, which implies that you only need a small portion of the total trade value to initiate and uphold your position. Although margin is not a direct expense, it plays a crucial role in how affordable your trade is.
In addition to the margin, a spread is also charged, which refers to the gap between the ‘buy’ and ‘sell’ prices of an asset. When initiating a long position, the trade is executed slightly above the current market price (buy price), while for a short position, the trade is conducted slightly below the current market price (sell price).
If you fail to close your position at the end of the trading day, you will be charged for overnight funding. It is important to keep this in mind to avoid any additional fees.
When Is the Best Time to Trade the Forex Market?
Determining the ideal time for trading forex is subjective and based on individual risk tolerance, as forex prices can be influenced by high liquidity and volatility. The commencement of the London session at 3 am (EST) typically results in heightened liquidity and volatility due to traders initiating interactions.
Typically, trading experiences a decrease in liquidity a few hours after it starts and then resumes when the American session begins at approximately 9:30 am (EST).
The foreign exchange market operates continuously for 24 hours every day, except for weekends, starting from 3 am on Sunday and ending at 5 pm on Friday, according to the Eastern Standard Timezone. This allows traders to choose a convenient time to trade and make use of the various active sessions available.
It is important to keep in mind that the opening hours of the forex market will be affected when certain countries switch to daylight savings time.
How Do I Open a Forex Trading Account?
If you're interested in forex trading, you can easily create an account with several companies online or through their mobile apps. Generally speaking, the account creation process is quick and hassle-free, and you're not required to add funds until you're ready to start trading.
Many platforms also give you the option of opening a demo account. With this account, you can practice buying and selling currency pairs in a simulated atmosphere. It's a great way to get hands-on experience without any risk.
The Bottom Line: Why Should You Trade Forex
Individuals with a financial background are finding the foreign exchange market to be a profitable venture due to its accessibility and constant availability. One reason why should you trade forex is the minimal entry barriers and the ability to access the market using a computer or mobile device.
Despite the opportunities that exist in forex trading, there is also a significant level of risk involved due to the high leverage. Therefore, individuals who aspire to succeed in this field must possess excellent skills and discipline.