There are major benefits to forex trading, but to uncover them you first need to understand what is forex trading.
What is forex trading?
For those in that group unaware of exactly what forex trading is, here’s a quick refresher.
Forex — or ‘FX’ for short — stands for foreign exchange, and it’s where currency trading happens 24 hours a day, 5 days a week. FX is the largest financial market in the world and is incredibly accessible, with traders having the ability to trade from anywhere, at any time.
Forex trading in its most basic form is the buying and selling of currencies to make a profit. A forex trader will speculate on a currency pair either increasing or decreasing in value. This decision determines whether they buy or sell the pair.
While it is true that forex trading can be risky and unpredictable, that’s also what makes it attractive to some investors. Unpredictability or volatility in trading is what creates opportunities, and opportunities in forex trading can result in profits (but also losses).
What are the main benefits of forex trading?
Here’s our complete list of the top benefits and advantages of forex trading that many people may not be aware of. See the comprehensive gifographic at the end of the page for a complete overview of this list.
1. 24-hour market
Where most stock exchanges are open from 9am-4pm (depending on the country where they operate), the forex trading hours are continuous from the start of the week on Monday morning in New Zealand until it closes on Friday afternoon New York time. That means you can trade 24 hours a day, 5 days a week, giving you more trading opportunities.
2. Free education to become a successful FX trader
Forex trading is easy to learn but hard to master, so this is why many people refer to trading as a ‘journey’. At Axi, we want to provide all our traders with the best educational content to start their trading journey on the right path. You can browse our range of free education resources — including webinars, forex trading courses, videos, articles and eBooks — designed to help you become the best FX trader you can.
3. All trading styles work
With the ability to make profit by going long and short, you can be successful using a wide range of different forex trading styles. For example, there are a number of forex trading strategies that allow traders to use technical analysis and fundamental analysis to execute trades confidently while following thorough risk management practices.
The trading style you intend to use really depends on the amount of time and effort you have available to dedicate to forex trading, as well as your end goals. But there are plenty of trading styles to trial: price action strategy, day trading, scalp trading, swing trading, and many more.
4. Cost of trading is low with no commissions
To make things easier, forex brokers tend to take care of any fees associated with trading. This means you don’t end up paying for things like transfers, deposits, withdrawals, or exchange fees.
At Axi, standard account users also have zero commissions while pro account users will be charged a small commission fee. There are a few exceptions, depending on the type of product you’re trading and how long you hold open trades, but on the whole the cost of trading is generally low and highly transparent.
5. Range of risk management tools
There’s always going to be risk when investing money into a financial market, whether that’s forex, commodities, stocks, or anything else. Proper forex risk management techniques are essential for forex traders who want to become successful in the long term.
Some crucial risk management elements available for you to use when forex trading include:
- Demo trading account
- Setting stop and limit orders
- Setting price alerts
- Using the right trading style to suit your risk level
- Adjustable risk-reward ratio
6. Leverage
The ability to use leverage in FX is one of the most appealing benefits of forex trading as it allows you to open a large trade position with a small initial investment.
The amount of leverage available is different depending on where you’re trading in the world, but let’s use leverage of 10:1 as an example. If a forex trader chooses a leverage ratio of 10:1, it means for every $1 of capital in their account, they can trade up to $10.
The benefit of utilising leverage is the potential to increase your profits, but it works in the opposite way too, where it can lead to greater losses. So, when applying leverage you always need to carefully consider an appropriate level of risk.
7. Profit from going ‘long’ or ‘short’
In other markets, it’s quite common for CFDs to be used for going both long and short on an instrument. In the world of forex, it’s a critical component as you’re always selling one currency to buy another.
For example, a currency pair is always shown with the base currency as the first pair and the quote currency as the second pair. This would mean the pair AUD/USD is priced on how much one unit of AUD is worth in USD.
If we think the Australian dollar is going to increase against the US dollar then we would buy the pair (going long). If we think the opposite is going to happen, and the Australian dollar will get weaker against the US dollar, then we would sell the pair (going short).
8. Highly liquid market
Liquidity is a general term to describe an asset that can be bought in the market without affecting the overall price of that asset. Forex is considered to have high liquidity because the forex market is so large and there are so many people trading that it’s incredibly difficult to manipulate prices — even by someone trading very high volumes. So, liquidity is important because it keeps prices comparatively stable.
9. Start with as little as $200
You don’t need a large amount of money to start trading forex. With the forex market being the most accessible financial market in the world, starting your trading journey for as little as $200 is definitely an option. When you do start trading you need to consider what you hope to achieve out of it and consider the level of your risk you’re going to take.
A lot of people treat trading as a way to complement their existing income. In fact, most traders start off by trading in their spare time as a way to earn extra money on top of their day job. Trading in this way lets you fit trading into your lifestyle, rather than making it the center of your world.
10. Start with small trade sizes
In forex, when you want to open a trade you need to choose the trade size, which is referred to as a ‘lot’. Your trade size will be determined by how many lots you are going to buy or sell in the trade. Lots are calculated using your account funding currency, and the lot sizes include:
- Standard lot = 100,000 units of currency
- Mini lot = 10,000 units of currency
- Micro lot = 1,000 units of currency
‘Micro lots’ are the recommended lot size for beginners. If your account is being funded by the US dollar then this would equate to $1,000 of the base currency you want to trade. When trading a dollar-based pair, the value of 1 pip would be 10 cents, allowing new forex traders to better manage risk.
11. Utilise technical analysis
The ability to read and understand charts, and utilise technical analysis, can be particularly useful in currency trading.
Buyers and sellers of currencies on the foreign exchange market determine the rates of FX instruments in real-time, while central banks maintain stability and the volatility of the currency.
No one can perfectly predict the way the market moves, but by learning some of the most common technical indicators — like support and resistance levels and Fibonacci retracement — you can identify where currency pair lows and highs are and make more informed predictions about future trends.
12. Forex trading platforms are free
When you create a live trading account with Axi you get free access to MetaTrader 4 (MT4). This world-class trading platform not only gives you access to 70+ currency pairs, but access to indices, commodities (like oil and precious metals), and cryptocurrencies.
You can download MetaTrader 4 on PC, Mac, iPhone and Android, or use the platform in your web browser through MT4 Webtrader.
13. Practice risk-free with a demo account
Before jumping into the real thing, it’s useful to get a feel for the ‘hands-on’ trading experience using virtual funds on a demo trading account.
As part of a sound risk management strategy, a free demo account allows traders the ability to try different trading strategies and styles without having to use any real capital.
Sign up for a demo trading account and get started with $50,000 of virtual funds.
14. Forex market isn’t correlated with stocks
The forex market is not directly correlated with the stock market, meaning that if the stock market was to see a large dip, it doesn’t necessarily mean the currency pair you are trading will dip too.
Now, that’s not to say there is zero connection. There have been occurrences in the past when stock indexes have gone into the negative and a currency pair has followed e.g. the USD/JPY and Nikkei moving in the same direction during the start of the global economic recession in 2007.
Source: Babypips
15. Trade forex from anywhere in the world
These days you don’t need to be stuck at a desk looking at six screens of charts to be able to get a good grasp on the markets. Technology has made trading super simple and portable.
For example, you can use specialist software — like PsyQuation or Autochartist — to help automate your analysis, then just trade on-the-go with a mobile device and check or update your trades when you need to.
16. Fewer overnight gaps than stock market
‘Gaps’ in trading refers to the break between trading market hours when a price is different to the previous session’s price. If the new opening price is higher than the last session’s price, it is ‘gapping up’, while if it’s lower it’s called ‘gapping down’.
Due to the forex market operating continuously 24 hours a day during the working week, there’s only one gap: between the close of the market on Friday and the opening on the following Monday. This presents a fairly straightforward and interesting trading strategy to utilise by trading weekend gaps in forex currency pairs.
Bonus benefit: 17. No centralised exchanges
The global forex market is not controlled by a centralised exchange. Instead, it operates almost constantly on a follow-the-sun cycle split into three main regions: Australasia, Europe and North America. The continuous trading operations between these financial centres provide traders around the world the opportunity to capture trades in a decentralised market in different time zones.
For example, if you’re based in Asia you can still trade during the European or North American time zone if you want to capture the big moves in the US dollar, the Euro or British Pound when those markets are at their busiest.
Regulatory bodies cover jurisdiction across the globe where forex brokers are most prominent, with an objective to ensure fair and ethical practices conducted by trading businesses. Some of the most important regulators include the Financial Conduct Authority (UK), Monetary Authority of Singapore (SG) and Australian Securities and Investment Commission (AUS).
Check out our comprehensive guide on the forex market hours to see when the best time to trade forex is.
See the complete list of benefits of forex trading in our gifographic below!
What are the risks of forex trading?
As you can see, there are plenty of reasons why becoming a casual or experienced forex trader could be lucrative. But with any positives, there will always be some negatives, so here are some of the common risks associated with forex trading.
- Using high leverage means high risk — Even as we say leverage is one of the main benefits of forex trading, you must be aware that it’s also a risk. Forex traders need to have a good grip over their emotions, a great understanding of leverage and a solid allocation of capital to be able to cut losses short if a trade doesn’t go their way.
- Process to determine market price is difficult — The exchange rates of currency pairs are influenced by a variety of elements like global politics, central banks or economic factors, meaning it can be hard to conclude on a meaningful result. Since a lot of how forex trading works is based on technical and fundamental analysis, interpreting information incorrectly and reading a chart wrong can potentially mean ending up with a negative trade.
- High volatility — The highly volatile forex market can be seen as a great way to make money, but there’s also an increased chance to lose with no control over geopolitical and macroeconomic developments. The 24/5 FX market makes it hard to be across the volatility and prices, and this is why proper risk management — like including stop losses for all forex trades — is crucial.
Conclusion
The global FX market is unique in its size, accessibility and opportunities it can offer. By taking a moment to look at how it works and the biggest advantages of forex trading, you’ll discover why this global market is so popular with people all around the world.
If you are considering becoming a potential trader, check out the gifographic and discover all the great benefits of trading forex!
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
Originally published at https://www.axi.com.
