Trading forex is a popular means of playing the financial markets for a number of reasons. Its benefits make it an irresistible lure for both experienced and new traders alike, and the prospect of substantial rewards over short periods of time continues to attract an ever-increasing number of new traders. But what exactly are the advantages of trading forex, and why does it bear consideration when there are so many other markets to choose from?
The first reason forex is advantageous to traders is because it has the capacity to deliver market-beating returns. Through a combination of high leverage and strong liquidity, traders can quite simply see a greater return on their money in forex than in other competing markets. At any rate, the returns available through forex trading far outstrip most off-the-shelf investment products, which added to the further benefits forex brings makes it a popular choice for those with capital to trade.
Low Barriers To Entry – Cheap To Start
As compared to other forms of investment, the barriers to entry into forex trading are minimal. Unlike share trading, where you will most likely be unleveraged in your trading and therefore require an absolute minimum of several hundreds of dollars of capital, forex offers much more generous terms, allowing traders to take positions for much smaller stakes. This effectively allows more traders to compete in the forex market, and in itself helps perpetuate the liquidity that the market benefits from to such a great extent.
Large Market = Level Playing Field
Forex is a massive market. In fact, forex is the biggest market area in the world, both in terms of volumes traded and in the number of different participants. Contrast this with some stock markets, particularly on alternative markets, where there may be the possibility of one or two major players influencing market price. In forex trading, you can be absolutely assured of a level playing field, and a fair market for all those participating in it. In terms of eliminating the risks of trading in smaller markets, this is an invaluable advantage of trading forex.
The forex markets are without a doubt the most liquid in the world. In practical terms, that means they deliver the quickest cash return from liquidation. Unlike shares, which have an indirect cash value, currency is currency. This has the effect of ensuring the markets operate with the greatest degree of efficiency, and that traders can open and close positions virtually instantly because of the constant flow of supply and demand provided by the markets.
Because currencies tend to move in less volatile cycles than other asset types, forex is traded on massive degrees of leverage. While some derivative instruments might trade in a ration of 20:1, forex can trade up to 500:1, meaning traders can take on positions of values many hundreds of times beyond their own capital resources. This has the effect of ensuring that tiny price movements deliver more amplified returns, and is in large part what gives forex trading its capacity to be so profitable and popular.
With forex trading, you trade around the clock, and markets never close or open. As a truly international marketplace, forex trading operated 24/5, so that traders in multiple time zones can conduct simultaneous trading. This ensures that you can make profit over a longer uninterrupted cycle, muting the effects of the opening and closing bells. Additionally, you can have a more flexible approach to the trading day and the timings of certain trades, in order to best focus on relevant circumstances as they unfold. With other markets you can experience big market gaps on the open and high volatility on the close but forex markets open 24 hours and thus there are no daily opening and closing times (only over the weekends).
Narrower Research Focus
Unlike stocks and other financial exchanges, the forex markets pose a lesser research field for traders to concern themselves with. There may be tens of thousands of different shares to consider across a variety of markets, all with different variables factoring in. With forex, there is only a small number of possible markets and currency combinations you can trade, with a much smaller net of news and research required, making the burden of researching positions and becoming an expert in your core markets much lighter.
Forex has a number of benefits that make it an attractive proposition for financial traders. Aside from the potential for significant returns from shrewd trading, the flexibility and unique market characteristics all add up to make forex the place to trade for those looking to seriously build their capital. It is important to also familiarise yourself with the disadvantages to make better decisions in the trading career.