Top 10 Benefits Of Forex Trading

Forex trading is exchanging one currency for another. This happens every day for a variety of reasons including traveling, tourism, business, and trading. In business, for example, an American company wants to buy cars from Japan; they have to pay them in yen. When an American tourist goes to Europe, they would most likely trade their U.S. dollars into euros. 

The Forex exchange market is not one central marketplace like the NYSE. Transactions occur globally 24 hours per day, five and a half days per week. A majority of the activity takes place during business hours in the United States.

Traders can trade in currencies and profit from the price movements relative to another currency. When demand for one currency is higher, it can drive its price up in relation to another currency. Traders profit off of these differences.

Currency traders or Forex (FX) traders trade pairs of currencies. The Forex exchange market will always show the value of one currency relative to the other currency. For example, when looking at the EUR/USD (euro/US dollar), there will be a price associated with the pair. This price will refer to how much of the second currency it will take to buy one unit of the first currency listed.

For example, if the price of the EUR/USD pair is currently 1.2127, it will cost $1.2127 U.S. dollars to buy one euro. To find out how many euros it would cost to buy one U.S. dollar, divide 1 by 1.2127, which equals 0.8426. If you were to look up USD/EUR, you would see that listed as its price.

How to Get Started

Trading requires opening an account with a broker. The broker typically provides an electronic platform where you make your trades and can view live prices of currency pairs. 

• Traders make money by placing a “bet” that the exchange rate between two currencies will move in their favor. 
• For example, if the trader expects the exchange rate to go up, he would buy the currency pair. If he expects the exchange rate to go down, he would “sell” the currency pair. (Selling the pair, or “short-selling” it, is simply placing a bet that the exchange rate will move lower.)
• The exchange rate is typically displayed out to 4 or 5 decimal places. The constant fluctuations in these 5-6 digit numbers are what provide traders with the opportunity to profit. 
• Day traders typically make very short trades, lasting seconds, minutes, or hours. During even short trades, exchange rates can fluctuate significantly. 

Traders enjoy trading on the Forex market because it offers a great way to profit, with numerous benefits including high liquidity, low transaction costs, and more. 

Here are some of the benefits of trading in the Forex market, plus a few helpful tips. 

1. Anyone Can Trade Forex

Forex trading is not just for big brokerage houses and you do not even need to be someone like Jordan Belfort from Wolf of Wall Street (streaming on DIRECTV STREAM) . Anyone can trade forex, and it doesn’t take a lot of money to get started. Some platforms will allow you to begin with as little as $100. 

Beginners should start with small trades to get experience. Before that, take advantage of the ‘demo’ trial periods that many brokers offer: allowing you to trade with fake money. 

2. Currency Pair Choices

Currency trading provides traders the chance to speculate on global events and the strengths or weaknesses of various economies. Some brokerage firms offer up to 80 different currency pairs to trade. Even with all those choices, it is usually best to stick with the major and minor currency pairs if you are a new trader. The most popular currencies are:

• U.S. dollar (USD)
• Euro (EUR)
• British pound (GBP)
• Canadian dollar (CDN)
• Swiss franc (CHF)
• Japanese yen (JPY)
• Australian dollar (AUD)
• New Zealand dollar (NZD) 

A major currency pair is any of the above currencies traded against the U.S. dollar, like EUR/USD. A minor currency pair would be any of the above currencies other than the U.S. dollar, like EUR/GBP.

You Can Trade Gold and Silver Too

Many FX platforms offer the opportunity to trade precious metals. Gold and silver are not only metals, they’re also chemical elements. And their chemical symbols (Au for gold, from the Latin aurum; and Ag for silver, from the Latin word argentum) are included in their forex symbol. 

Forex symbols for Gold and Silver:

• XAU is the FX symbol for gold
• XAG is the FX symbol for silver 

When you trade gold and silver on FX platforms, usually it’s being offered at “spot price” - or the current price. (This is different from the price for gold or silver futures contracts.) And trades are offered as currency pairs. Here are some examples:

• XAU/USD (Gold - US Dollar)
• XAG/GBP (Silver - British Pound)

Some platforms even allow you to trade the exchange rate between gold and silver: e.g., XAU/XAG or XAG/XAU.

3. The Largest Market

The Forex market is the largest financial market in the world. Approximately $5 trillion is traded daily on the Forex market or about $3 billion per minute. Traders from all over the world participate in the Forex market. It is the most accessible financial market globally.

4. High Liquidity

Since it is the largest market in the world, it offers high liquidity and high volume. High volume means high liquidity, and high liquidity means that traders are able to buy or sell the currency pairs they want to when they want to.

This is especially true when trading the major or minor currency pairs. High liquidity keeps the spreads tight or narrow, which is why high liquidity keeps transaction costs low.

5. High Volatility

The Forex market can have high volatility at times in certain currencies. There could be notable economic news in a country that causes its currency to become volatile, therefore causing large price movements. 

Traders can profit from these times of high volatility, whether the currency is going up or down. High volatility should be watched carefully, as the market can turn against a trader’s position quickly.

6. Ability to Trade Up or Down Markets

Using various strategies, traders can make money whether a currency is going up or down by going long or short. During periods of high volatility or economic uncertainty, the market could be riskier, but the chance of higher profits is greater. 

For example, a trend can be traded in one direction, and when the trend reverses, it can be traded in the other direction.

7. Leverage

Leverage gives traders the ability to control and trade large sums of currency without having to put up much of their own money. It is essentially borrowing money from the broker to trade with. Leverage can of course be risky, but with proper hedging strategies in place, traders can make a good profit. 

Leverage is displayed as a ratio, and each brokerage firm and some countries have restrictions on how much leverage is allowed.

8. No Commissions

There are no exchange fees or clearing fees, and many brokerage firms have no commission trades. These brokerage firms earn their money in the spread or the difference in the bid and ask price. 

Currency spreads are usually narrow or tight. In other words, the cost of the trade will be reflected in the bid-ask price spread.

9. No One Controls the Forex Market

Due to the immense size of the Forex market, it is practically impossible for a single entity to control this market. The Forex market stabilizes itself, and the playing field is level. There are also no middlemen in the Forex market because it is decentralized. 

Traders trade with other traders with the Forex brokerage firm facilitating the trades. The economies of the world influence the Forex market, not a major corporation or hedge fund.  

10. Hedging Strategies

Because the currency markets can be so volatile, traders must know the risks and learn about hedging strategies. Hedging is a way to reduce the risk of currency trading. Hedging also allows traders to mitigate risk or limit losses to a predetermined amount.

Hedging usually means opening several positions at once. One of the most common hedging strategies in currency trading is using multiple currency pairs. Traders will choose Forex pairs that move in tandem or have a positive correlation but take a position in the opposite direction.

An example would be to go long GBP/USD and short EUR/USD. By taking opposite directions, the trader limits the downside risk in this trade. A loss on the short EUR/USD position can be reduced by a profit in the long position on GBP/USD. 

Summary

Anyone can trade the Forex market, and it doesn’t take a huge sum of money to make profits. Although of course, it always comes with risk. By sticking with the major currencies, there is high volume and liquidity that makes getting in and out of trades easier to navigate. 

Transaction costs are low because of the high liquidity, which means traders get to keep more of their profits. Learning hedging strategies can also help to limit losses. Forex trading is one of the best ways to speculate on a country's economy and the price movements of its currency.