In the world of Forex, swapping currencies is the name of the game. Foreign Exchange trading, also known as Forex or currency trading, refers to the world’s largest financial market upon which one currency is traded with another for profits. The top ten most traded currencies in the Forex market include USD, Euro, Japanese Yen, British Pound, Canadian Dollar, Swiss Franc, Australian Dollar, Swedish Krona, Hong Kong, Dollar and Norwegian Krona. The prices of these currencies fluctuate on the basis of its supply and demand. Other factors such as interest rates and the country’s financial and political state can also affect the worth of the currency. The participants of the Forex market are very diverse ranging from multinational corporations and banks to small businesses and even individual traders.
In addition to that, there are 10 unique benefits of Forex trading that attracts thousands of traders from all over the world on a daily basis. Let’s look at all of them individually.
1. Trades can be made every hour– Unlike stock market, the world of Forex never sleeps. Being open 24 hours gives the traders a chance to trade any time of day or night. That said, activity level of the market does fluctuate throughout the day, and any veteran Forex investor will tell you that the best time to trade is when activity level of the market is at its highest (we will get to the why a little later). There are four major sessions the Forex market is divided into. These include New York, Sydney, Tokyo and London. When one session closes, there is always another one that is opened; thus, keeping the market open 24 hours. The busiest time of the market is when two trading sessions overlap.
2. Highest Liquidity– Liquidity is determined by the market size (amount of active participants) and the number of trades (buying and selling of currencies) happening at any given time. The Forex market has the highest liquidity among any financial market. Because of the high amount of participants trading currencies at any given time, it is estimated that about US $4 trillion worth of exchange happens on a daily basis.
Now remember how in point 1 it was mentioned that the best time to trade is when the market is at its busiest? Here is why- This peak time is when the liquidation is at its highest. This is when the most exchanges happen, which means more opportunities and good deals. This is also when the market’s volatility (currency’s price fluctuations) is at its lowest. So it is easier to make a profit in short amount of time by making a spot trade when the currency’s price is good. On the other hand, when the liquidity is at its lowest, the trades become very slow and the fluctuations of prices happen slowly. It is also important to mention that the price changes are drastic. Hence, it is very easy to lose money during this time.
3. Leverage– In layman’s terms, this feature allows the trader to trade more money than the amount present in trader’s account. This gives the trader a chance at getting hands on huge profits by investing a small amount. In most cases, the trader gets to choose their own leverage. Leverage is a ratio. Let’s say that you have $500 to invest in your account and that you are entering into a trade with a leverage ratio of 50:1. This means that for every $1 you can trade for up to $50. Now for as little as $500, leverage gives you the power to trade up to $25000.
4. Low Capital– This feature is what makes Forex attractive to so many working class individuals. It allows you to start trading with as little as $100 in the account.
5. High Return on Investment– In Forex, leverage allows potential for a high ROI than any other financial investments such as stocks, bonds etc. Currencies with low volatility can produce high ROI’s.
6. No commission on trading– Mostly all dealers/brokers do not ask for a commission on making a trade. Instead they are compensated with a bid/ask spread. A bid refers to the price at which the buyer is willing to purchase the currency. Ask, on the other hand, refers to the price that the seller wants to sell the currency for. The difference between the two is a spread. Since currency is the most liquid asset in the world, it has the lowest spread; stocks, on the other hand, has a high spread. In Forex market, spread can be kept low by always trading in currency pairs that are has the highest liquidity. Some of these include Euro and USD, Euro and GBP, and GBP and USD.
7. Forex is omnipresent– Because of its global nature, the Forex Market can be accessed from anywhere. It does not have a physical location, and all the exchanges occur automatically. This allows for the trades to occur in matter of minutes. Also, because of its high liquid state, it is easy to make a huge profit in a less amount of time.
8. Forex is a Bull Market– Bull market refers to a financial condition when the market is on an upward swing. Its opposite is the “Bear market”. The Forex world, on the most part, is always a Bull Market. Why? Because at any given time, you will always find a currency whose price are going up. That said, it is also true that every bull market will always have a parallel bear market. This is because currencies are always traded in pairs and, for example, if Euro depreciates in value against USD, Euro investors will lose money (Bear Market) and USD investors will gain profits (Bull Market).
9. Can be easily learned– One of the biggest benefits of Forex is that everyone can participate. Yes, it’s true that not everyone is born a financial whiz but it’s also true that, with the easy access to knowledge that Internet provides, everyone can learn the basics for free. In addition to that, with Forex trade simulators, inexperienced traders can now get a feel of the real world of Forex without losing their hard earned cash. It allows amateur traders to learn the process and hone their skills by placing mock trades.
10. Quit and sell whenever you want– Forex allows you to enter and quit at any time you want. Along with that, through spot trades, Forex also allows you to buy or sell a currency right then and there to take advantage of its current price. It also allows you to make profits by going short (also known as short sale). This is when you purchase a currency and sell it, and purchase it back at a lower cost than what you sold it initially for. This difference would be the profit you made. Along with that, Forex also allows you to make a profit by taking advantage of the currency’s increasing value by going long (or making a long sale). This is when the currency is sold at a later period of time for a higher price than what you paid.