There are multiple markets that professional traders use to make a profit. If you’re looking for the benefit of forex trading, this is a question that we will dissect. What specifically about the forex market do traders consider as a benefit?
Today we will examine the benefit of forex trading for both retail investors and institutional investors. The latter means large investors with access to billions in capital. It includes pension funds, investment banks and hedge funds. Retail investors use their wealth to try and turn a profit and usually operate on the much lower end of the scale. So first off, let’s start with the basics.
What Is Forex Trading?
Forex trading is the buying and selling of currencies on the foreign exchange market. A key benefit of forex trading is that it is a global marketplace where traders can exchange currency pairs. If you are wondering when you can trade forex, the market doesn’t close during the week; it is open 24 hours a day. As a result, it is one of the most liquid markets in the world, with an estimated daily turnover of over $7 trillion.
Main Currency Pairings
While dozens of currencies are paired, the main trading pairs that see the most volume revolve around the US Dollar. Due to the liquidity involved, there is more guarantee for traders looking to buy and sell significant positions. As the optimum world currency, the US Dollar trades in major pairings of the Euro (EURO), GBP (Great British Pound), and Canadian and New Zealand Dollars (CAD/NZD). Other pairings include the Swiss Franc (CHF) and the Japanese YEN (JPY).
As well as forex trading benefits allowing access to high liquidity, low transaction costs, and the ability to use leverage to maximise your profits. Additionally, traders can take advantage of scalping, hedging, and arbitrage strategies.
Scalping for beginners might not be the easiest way to begin your trading journey. However, money is still to be made in this industry so long as you understand it correctly and conduct thorough market research. One of the benefits of trading forex is that you can build your knowledge yourself.
However, you can still lose all your money even with the best knowledge of the market and the utmost due diligence. This is because your capital is always at risk, and even though the market may have behaved in one way historically, this doesn’t mean it will do the same again.
Medium To Long-Term Investment Strategies
One option for those looking to implement an investment strategy over a more extended period is swing trading. If you’re entering the forex trading market in 2023, there are many things to consider. First, irrespective of your trading strategy, you must perform a lot of research. If you do not understand the currency pairings you are trading, this is very risky, and you could lose a lot of money.
Whether you are trading short, medium or long-term, there are several chart patterns you can attempt to use to your advantage. This includes several different candlestick patterns, which you can also learn about.
With these features combined, forex trading can be an attractive investment opportunity for those looking to diversify their portfolio or increase their earning potential. Trading with a full-time job is more difficult as you do not have as much time as professional traders. However, a lot of experienced traders will mix their forex portfolio with other tradable assets, including
- Commodities – such as gold and silver
Now that we have established the sort of portfolio spread you can find on the books of many professional traders and identified why forex trading is so propitious for many, let us find out the specific benefits of forex trading. Instead of focussing on a singular benefit of forex trading, we have highlighted ten for you today.
#1 – Leverage & Margin
Leverage and margin are two of the most critical concepts traders need to understand when trading in the forex market. However, this technique is not advised for beginner traders. The benefit of forex trading is that you can use these tools due to the high levels of liquidity in the market.
You can leverage a currency pair anywhere between multiples of 1 to 100. One of the critical differences that you must be aware of is that you can be liquidated when using leverage. A standard spot trade can be rough if there is a serious market correction. However, not as bad as a leveraged trade.
If you do not employ effective measures such as a stop loss or take profit level, your entire position could be liquidated if it reaches a certain point. So this definitely wouldn’t be a benefit of forex trading if you poorly executed it.
A trailing stop loss is one of the most common tools to mitigate risk effectively. Another benefit of forex trading is that you can use automatic levels to buy and sell your asset and remove the negative emotions of trading.
Leverage allows traders to control a more significant amount of capital than they would be able to with their funds. At the same time, the margin is the level of capital to authorise the position. For example, George Soros used leverage to short the GBP on Black Wednesday in 1992 and netted millions of dollars.
Traders can use leverage to increase returns on investments, while margin accounts can help traders manage risk by allowing them to maintain a smaller balance in their accounts. Understanding these concepts is an essential part of successful forex trading.
#2 – Low Transaction Cost
Low transaction cost is a benefit of forex trading that most traders will highlight as the main selling point. Of course, this can vary depending on what country of the world you operate in. However, generally speaking, the transaction cost is one of the key benefits of forex trading. With the help of low transaction costs, traders can save a lot on their trading expenses. This is because the spread cost is generally lower than in other forms of trading.
The spread cost is a fee brokers charge for executing orders in the market. Depending on the currency pair and broker, it usually ranges from 0 to 2 pips. Low transaction costs make it easier for traders to enter and exit trades quickly without incurring significant losses due to high spreads. Therefore, shorter-term trading methods such as scalping are preferred to more extended periods such as day trading.
Overall, low transaction costs are essential for successful forex trading as it allows traders to keep their trading expenses down while still capitalising on potential profits from their trades.
#3 – High Liquidity
With quotes such as “fortune favours the bold” and “if you don’t risk anything, you risk everything”, – beginner traders might be enticed by the profits on offer courtesy of some big traders and investment banks. However, with big banks slashing banker bonuses, it is crucial to get a balanced view.
Much like anything in life, the truth is somewhere in the middle. There is no get-rich-quick scheme, and trading forex is a tough market to navigate, especially as a retail trader or investor. That doesn’t mean that you won’t be able to
Some traders make large amounts of money due to the high liquidity on offer. High liquidity is generally regarded as a crucial benefit of forex trading. Essentially, this means that in the event of a serious price retrace or boom, the money is available for you to buy or sell your chosen forex pair.
#4 – Volatility
Volatility, however, is the degree to which an asset’s price fluctuates over time. High liquidity and volatility in forex trading can offer traders a range of advantages, such as reduced transaction costs, faster execution times and greater flexibility when entering and exiting positions. It’s not all fun and games, though.
As ever, markets are so dangerous because what goes up must come down. A severe correction can result in a heavy loss, and as we touched on earlier, if you are trading with leverage, you could lose all of your money. However, if you time your trade at the bottom and the market rebounds, the volatility can be seen as a benefit of forex trading.
#5 – The Internet
Despite naysayers and eternal pessimists besmirching the impact of the internet on society, there are many positives. Many would argue that it has also facilitated a tremendous amount of good. The rise of the internet is one of the biggest forex benefits.
Knowing what news will move the market is vital if you implement effective trading psychology. Economic news, world news and global economic indicators are just three crucial components. Another benefit of forex trading is that if you can observe these correctly, you could begin to have a strategy that works.
Due to the substantial institutional investment, many multinational and multi-billion dollar corporations have skin in the game. This is why trading forex is considered a better market for some traders, as you can’t as quickly move it up or down compared to markets such as cryptocurrency.
#6 – 24/7 Market Accessibility
Forex trading offers investors the opportunity to access the global market 24/7. Some may argue that this isn’t necessarily a benefit as the market could move in the middle of the night when you aren’t at your trading desk. However, the risk management strategies discussed earlier are one way to turn a potential negative into a serious benefit of forex trading.
This benefit is significant for those who want to take advantage of international market movements without worrying about time constraints. This type of trading benefits people on all levels of the financial spectrum, irrespective of the time zone.
For instance, if you are trading outside your full-time job, this may be a positive for you. But, on the other hand, stock trading can be more difficult, as the markets are only open between New York business hours.
Why trade forex when you can trade during business hours and rest easier in the evening? Well, that is one market often made, which entirely depends on your trading psychology.
With 24/7 market accessibility, traders can make decisions and execute trades at any time of day or night, allowing them to capitalise on profitable opportunities no matter when they arise.
This benefit also allows traders to monitor their positions and adjust as needed, ensuring they are always in control of their investments.
#7 – Variety of Trading Instruments
Trading instruments are the tools that traders use to speculate on financial markets. They come in many forms, such as futures and buying or selling options. A variety of trading instruments is essential for traders to diversify their portfolios and manage risk more effectively. Moreover, insulating yourself from a serious market downturn is critical to turn forex trading into a prosperous venture.
With various trading instruments at their disposal, traders can also reduce the risk associated with investing in one asset class or instrument by diversifying their investments. It may not be a benefit of forex trading, but it makes up part of a more extensive portfolio which contains forex.
#8 – Available Literature
Unlike other markets, forex has a set rule of criteria that some incredibly successful traders have used in the past. Although cryptocurrency has proved an extremely lucrative avenue for some, as it is such a new market, you won’t find a wealth of literature on the topic from experienced and reputable traders.
This doesn’t mean you will be able to become an overnight success story; far from it. However, the internet isn’t always reliable, and the trading advice isn’t verified. Nevertheless, there are plenty of forex trading books, which is a benefit of forex trading, leading to it becoming a popular income stream.
#9 – Online Communities
This one can act as a positive and a negative. The internet is a global forum; not all advice will be in good faith. However, there are plenty of professional traders who offer support online.
Whether via their YouTube channel, paid subscription services or active social media accounts. We aren’t saying you should pay money for their services, but you can find plenty of good advice online. Hence, the online forex community is another critical benefit of forex trading.
#10 – No Overall Ownership
Arguably the most underrated benefit of forex trading is that there is not one sole entity that drives the price of assets. Instead, Forex markets move in line with the economy, and many analysts state this is why trading forex is a better market than other assets such as stocks or cryptocurrency.
Some have argued that commodities markets such as gold and silver operate similarly. However, forex is so intertwined with the value of several of the world’s biggest economies that there are no questions about ownership, market manipulation or liquidity issues.