Why Should You Trade in the Forex Market?
There are various financial markets around the world to trade; stocks, commodities, equities, indexes, forex and many more. As a beginner trader or someone who is interested in pursuing another source of income, one might ask what might be the best market to trade or what are the benefits of trading that respective market. There is opportunity to make money in all financial markets, but which one is best suited for you? Here we look at the biggest market from the financial world, the foreign exchange market.
The foreign exchange market, or the Forex market, is the market in which individuals can trade various currencies around the world. It is a global decentralized market that determines the foreign exchange rates. Each market has its own benefits to trading and the following benefits underlie why many traders love to trade the forex market.
Around the Clock
What differentiates the forex market from the other markets is the operating hours. Starting from Monday morning in the Asian markets to Friday afternoon in the American market, the forex market runs 24/5. This means that currencies are being traded continuously during the day and overnight, with less market gaps that you would typically see within the stock markets. This 24/5 availability of trading hours allows individuals to trade anytime during the day. Let’s say you work from 9am-5pm during the day and want to start trading in a suitable market, the forex market allows you that flexibility to trade in the morning before work or in the evening after work.
Individuals trade to earn profits and like to be exposed to high liquidity to support their living. Traders in the forex market are exposed to a financial market on which $5 trillion USD are being traded daily, on average. Because of this high volume of cash that is being traded daily, this makes the Forex market the largest financial market in the world. Due to its very liquid nature, individuals experience rapid trade executions. With the rapid executions, traders take trades with just a touch of a button. This also allows traders to get out of trades easily to avoid huge losses or lock in big profits.
Individuals looking to become exposed to the forex market have the opportunity to trade real time prices for various currencies with so-called “monopoly money”, mainly known as paper trading. Before investing their own money into the market, individuals can open a demo trading account with one of the many brokers to experience real market conditions. Experiencing the many situations taking place in the forex market before risking any capital, gives individuals the edge to gain knowledge of how the market works and runs. Demo accounts allow the trader to gain confidence in their trading and test various strategies they might have in order to earn profits.
Costs and Leverage
Costs are very important to every individual and is a prime factor. Along with the money deposited into the trading account to invest in various securities, every individual will have to pay certain trading fees that are mandatory. Individuals trade securities through brokerages, or brokers, who arrange transactions between buyers and sellers. Normally when trading stocks, brokers charge a commission fee, a fee which is applicable on every trade that is executed from the traders end. However, in the forex market, brokers make money on “spreads”, which is the difference between the bid and ask price. For currency pairs, the spreads are relatively low, which means that brokers do not charge as much, leading to lower costs. However, in some cases, spreads can be variable where the spread fluctuates depending on market conditions.
When trading currency pairs, every broker offers a certain degree of leverage to the trader. If the broker offers a leverage ratio of 1:200, the trader has the opportunity to invest 200 times the money they are able to invest in any currency pair. In other words, if you have $100 dollars to invest in USD/CAD, you are able to invest up to $20,000 ($100*200) with the help of the brokers leverage. This leverage can help you lock in big profits, however, it can always lead you to bigger losses.
In order to trade in your newly opened account, most brokers require a minimum balance in the account. Typically, the minimum requirement ranges from $50-$500, depending on the broker. These low balance requirements are perfect for an individual that does not wish to risk more than a certain percentage of their account. With the option of leverage, low trading costs and opportunity to start small, forex trading is the perfect way to invest your money in the financial markets.
With its 24/5 availability, quick trade action, low costs and opportunity to practice in real market conditions, this allows new individuals to admire what the foreign exchange market has to offer. Many traders love different factors about the forex market which is why they choose to trade the various currency pairs.
If you think the benefits of trading Forex above could match your trading style, open a demo account with one of the many brokers and get involved with the largest financial market in the world.
You may also be interested in: Forex Trading Basics
Writer: Saket Patel
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