Before we go into reasons why trade forex, let’s quickly recap what Forex trading is. Forex trading involves buying and selling currencies on the global foreign exchange market. The aim is to profit from fluctuations of exchange rates. You can trade currencies through various instruments like futures, CFDs, etc. This post is about the spot market, which is the primary Forex market where currency pairs are swapped and exchange rates determined based on supply and demand dynamics in a real-time auction process.
So why trade Forex in the first hand? Especially those new to trading usually gravitate towards either stocks or Forex. We will take a look at the key benefits of Forex trading here. In addition to advantages over stock trading.
Low barriers to entry
If you google forex brokers, you’ll notice that many offer trading accounts with minimum starting capital of as low as $50. This is significantly lower than the requirements for most other asset classes. Reasons for this are mini and micro-lots and utilization of leverage. Leverage is explained below. A mini-lot is 1/10 the size of a standard lot of 100,000 units of base currency. So with a mini-lot, you control 10,000 units of the currency you trade. Micro-lot is 1/100 of standard lot, so 1,000 units of currency.
Leverage means that you can enter and control a position much larger than your deposit. Many offshore brokers offer leverage of up to 1:500 or even 1:1,000 in some cases. The EU is highly regulated, but even here the typical leverage offered is 1:30. What this effectively means is that even with a $500 deposit, you can buy or sell $15,000 worth of currencies. On one hand, this provides you with the opportunity to make large profits from a relatively small investment. But this goes both ways. Trade with irresponsible risk management and you can blow your account really fast as well.
The Forex market is the most liquid market in the world. Each day, typically $6-8 trillion worth of currencies change hands. This is a huge advantage as thanks to the size of the market, you will never run into liquidity issues. Meaning you’ll always be able to get in and out of trades at will.
A 24-hour market
No need to wait for the regular trading hours as with stocks for example. From Sunday 5pm EST when markets in Australia and then Asia open to Friday 5pm EST close in New York, Forex trades around the clock. This is a great advantage especially for those looking to trade intraday, who might require some flexibility due to a full-time job or family duties. Whenever you are able to trade, the market is there for you.
No one can corner the market
Due to the size of the Forex market, it’s simply impossible for any single entity to control the market price for an extended period of time. Now don’t get me wrong, manipulation still does happen on lower time frames for short durations of time. But as we will explain in other posts, this is something we can exploit.
On Forex, you have the ability to go both long and short with a click of a button. If you trade other assets, trading on the short side might not be as easy and often requires the use of derivative products or specialized trading accounts. Or being limited by the uptick rule that requires short sales to be conducted at a higher price than the previous trade. On Forex, you simply sell one currency (the quote currency) to buy another (the base currency).
I’m not saying it’s easy to learn to trade Forex profitably. But the large popularity of this market has led to the creation of lots of educational resources. Some of them are free, like BabyPips. Others are paid, like my #1 rated resource to exponentially shorten your learning curve.
Forex vs Stocks
There are several reasons why trade forex over stocks:
There are lots of positive reasons why to trade forex. From the low account minimums, through a wide range of educational resources to the advantages resulting from the huge trading volume and high liquidity. In the end, you need to decide for yourself if Forex Trading is for you. If the answer is yes, check out some of my other posts and feel free to drop me a comment with questions. I will be happy to guide you in the right direction.