If you’ve been considering starting a side business trading the Forex market, or are interested in pursuing Forex trading as a profession, then you will want to start by performing the necessary research to ensure that it aligns with your specific goals. The subject matter that we will cover here relates to Forex trading advantages, and how those characteristics compare to other financial markets.
Benefits of Forex Trading
There are a great many benefits to trading the Forex market. Although it is beyond the scope of this article to list each and every advantage of trading Forex, we will highlight 10 of the biggest reasons for trading the FX market. Now, I should note that, although the benefits of trading FX far outweigh the drawbacks, traders cannot automatically assume that they will be successful in their Forex trading activities.
That is to say successful trading in forex, as with any other market venue, requires a reasonable amount of education and trial and error. As such, you should be prepared to put in the necessary work to ensure that you are giving yourself the best chance of success.
So what exactly does a reasonable amount of education entail? Well, that will be different for each trader based on their specific skill set and level of experience in the market. Having said that, aspiring Forex traders should take time to study both fundamental and technical analysis techniques.
Being exposed to different schools of thought and trading techniques will allow you to pick and choose those methods that you’re most comfortable with. This is important because in order to achieve long-term success in your trading activities, your method must align closely with your own personality traits.
Biggest Financial Market
One of the majors pros for trading forex that is often touted is that it is the largest market in the world. This is true and in fact, the total transaction value within it runs in excess of several trillion dollars per day. The equities markets, and the futures markets register much less transaction value on a daily basis. Now, there are some very obvious benefits to trading a highly liquid market such as the Forex market.
For one it allows you to enter and exit your positions with ease, and without any major concern for slippage. Slippage is essentially the difference between your order price, and your final executed price. In some smaller markets your final executed price may be several ticks or more away from your original order price. This can be a hidden cost that can work against you in the long term.
Within the FX market, the major currency pairs offer huge amounts of liquidity. As a result, slippage is not a major concern for most FX traders and as such it does not have an adverse impact on your trading results in most cases.
Additionally, because of the depth of the Forex market, there is little chance for manipulation by any single player or institution. As such, Forex traders can rest assured that trends in the market are in fact real, and not the result of some obscure market participants trying to pump up the price or push prices lower for their own benefit.
Trades Around The Clock 24/5
Many markets around the world tend to have a distinct opening and closing time, wherein the majority of trading volume occurs. An example of this would be the US equities market, which is open from 9:30 AM Eastern to 4 PM Eastern. The majority of trading volume in Stocks, Options, and ETFs will occur within this day trading session.
But the foreign exchange market trades around-the-clock 24 hours a day five days a week. And for the most part, the trading activity is relatively stable throughout the different trading sessions. This is because as a global market, traders from one money center take over, as traders from another money center are retiring for the day.
This continues throughout the three major trading sessions encompassing the 24 hour period. More specifically, the three major trading sessions within FX include the Japanese session, the European session, and the US session.
This is very advantageous for FX traders because regardless of your work or personal schedule, you can always find time to place orders and perform other market related activities. A large segment of Forex traders consider themselves part-time traders. The hold down a full-time job and engage in FX trading as a side business. Due to the 24/5 nature of the FX market, these types of traders have ample opportunity throughout the day to engage in the market on their own time.
Wide Range Of Instruments
There are dozens of different currency pairs that FX traders can have in their watchlist. And so, traders who are seeking a wide range of instruments for trading their strategies, will be able to clearly see the benefits of currency trading.
Now, although there many different currency pairs to choose from, most traders should stick with the major and minor currency pairs. This is because these forex pairs offer the best characteristics in terms of volume and volatility.
Generally, major currency pairs include those that are traded against the US dollar, and the minor pairs include those that are traded against the Euro, Pound or Yen. Some of the major pairs include EURUSD, GBPUSD, USDJPY, AUDUSD, and USDCAD.
A few of the minor pairs include EURJPY, EURGBP, GBPJPY. Exotic pairs tend to have less volume and as such can be highly volatile in certain situations. Exotic pairs will tend to include currencies from countries such as South Africa, Norway, Singapore, Mexico and other countries.
Additionally, many foreign-exchange brokers also offer crypto trading as part of their service offering. This can help widen the number of trading instruments available to Forex traders. The most popular cryptos offered by FX brokers include Bitcoin, Ethereum, Litecoin, and Ripple.
Low Trading Costs
Another benefit of foreign exchange trading is the generally low overall cost structure. There are two primary types of broker models within the foreign-exchange industry. The first is a zero commission market maker model, wherein the Forex broker does not charge a per trade commission, but rather makes a markup on the wholesale spread.
The other primary type of broker model is the ECN model. Within the ECN model, brokers will pass on the bid ask wholesale pricing directly to the client, but will charge a small commission for executing the trade. Generally, the ECN model will provide for a better cost structure to the trader over the long-term.
Regardless, the overall transaction costs within the Forex market are relatively low. The bid ask spreads for most major currency pairs and minor currency pairs are within two pips or less. As such, there is ample room to make profit. This is certainly true for swing traders and position traders.
Although the transaction costs will tend to be a bit higher for shorter-term day traders and scalpers due to their increased activity in the market, even these traders can extract a reasonable edge from their Forex trading activities after trading costs have been taken into account.
Ability To Use Leverage
Are there any advantages of FX trading as it relates to leverage? Well, the Forex market offers a huge benefit to those traders who are seeking to amplify their returns through leverage. Depending on your jurisdiction, you may be able to enjoy leverage amounts ranging from 20 to 1, all the way up to 500 to 1 and more.
Now it’s important to keep in mind that leverage is a double-edged sword. That is to say that it will act not only to amplify positive returns, but also act to amplify negative returns. As such, traders should use leverage in a responsible manner to ensure that they do blow up their accounts.
If you compare these leverage limits to those offered in some other traditional markets such as the stock market, you can see the huge potential that Forex trading offers. Within the US market, most stockbrokers will only be able to offer a maximum of 2 to 1 leverage on your qualified stock positions. This limit can be increased and reach about a 4 to 1 leverage level if you are utilizing portfolio margin.
Regardless, the ability to control a large currency position in the Forex market with minimal margin requirements is unparalleled. When implemented correctly, traders can amp up their leverage at lower account levels, and steadily decrease leverage utilization at higher account levels, to achieve fast compounded growth within their FX trading account.
Free Practice Accounts
It’s often said that practice makes perfect. Well, in the financial markets we can never achieve perfection, however, practice will certainly help drive us closer to that end. Most Forex brokers offer their users a demo or practice trading account to help build their skills. The most popular trading platform offered by Forex brokers is Metatrader. Metatrader can be utilized within a demo trading environment, as well as a live trading environment.
By practicing your skills in a simulated environment, you will begin to learn all the basics and mechanics of trading. Once you’ve mastered all the rudimentary aspects of trade execution, you can move into more advanced areas such as strategy building, and strategy back testing.
A Metatrader demo account will allow you to perform all of these functions, so that you can be prepared when you shift over to trading in the real market environment. Even experienced traders can benefit from a demo account. This is because veteran traders often test out a new strategy in a demo account before committing their capital behind it.
Profit From Rising and Falling Prices
Another advantage of the Forex market is that traders can take profit from bullish trends as well as bearish trends. Since FX traders can just as easily position to the short side as they can to the long side, they are able to profit from price direction regardless of whether the direction is up or down. This is a major advantage that cannot be underestimated.
Compare this flexibility of going long or short to trading stocks for example. Within the United States, there is what is called the uptick rule. The uptick rule requires that a price of a stock trade higher before it can be shorted by any market participant.
Because of this, during fast-moving markets that are headed lower, it can be very challenging, if not impossible, to take advantage of such price moves. Even during normal market conditions, the uptick rule can weigh down a short trade opportunity in terms of optimal price execution.
Forex market traders are not encumbered by such rules. This further adds to the reasons to trade forex. Aside from a catalyst event that can drive the order flow towards one side of the market, during most normal market conditions, there is sufficient order flow on either side of the market, making it relatively easy to get executed on a long or short position, with minimal slippage.
Flexible Position Sizing
Another major advantage of the foreign exchange market is the incremental lot size that can be utilized. More specifically, many Forex brokers allow trading increments that range from standard lots all the way down to micro lots.
Standard lots are typically used by larger institutions and traders that have a solid amount of capitalization. Mini lots are typically used by the retail trading public. The mini lot is 10% the value of a standard lot size. Finally, the micro lot represents 1% of the standard lot size. Micro lots are typically used by beginning traders or those with a very small capital base.
Incremental lot sizes allow you get very granular in your position sizing model. Instead of just having to take a position with one standard lot, which may translate to $100,000 contract size, a small retail trader with less than $1000 in their account, can take a much smaller position and may opt to initiate a five micro lot position, for example. In this case, that would translate to a $5000 position.
This type of incremental lot sizing is extremely beneficial for smaller traders who do not have the capitalization to effectively trade standard lots, and require smaller positions based on their smaller account sizes. As traders build up their account they can move from micro lots to mini lots to standard lots. The Forex market offers tremendous versatility and scalability in this regard. This is a major advantage of currency trading that is quite unique.
Limited Starting Capital Required
When you’re ready to open a live trading account with your Forex broker, you can usually do so with a nominal amount to start with. This is because many Forex brokers have set small minimum amounts for account openings. As such, with as little as $500 or $1000, aspiring traders can enter into the Forex market.
Having said that, traders should still treat their Forex trading as a business rather than just a hobby. By getting into the mindset of trading like a professional rather than an amateur, it will help you to make better decisions in the market, which in turn will provide you a reasonable chance to grow your account.
One mistake beginning traders make is that they often enter into the Forex market because they have either heard or read that they can make quick profits on their invested capital. Although this is true in a sense, the reverse can also occur, and does so more frequently. That is to say that trading forex with a gambling mentality will often lead to less than desirable results.
If you just looking for a long shot bet to make some quick profits, you may be better off buying a lottery ticket or playing the roulette wheel instead. Forex trading is a serious endeavor, and you should treat it as such, otherwise your efforts will likely be in vain.
Abundance Of Education Available
Another great benefit of forex trading is that there is an abundance of training and education that is available. Some of this education comes at a cost, but a lot of it can also be found for free on various blogs, forums, and other trading communities.
It’s up to each individual trader to take advantage of these resources to help them excel in their trading journey. Additionally, although there is a great deal of free and premium information available on the web about Forex trading, you must be selective and do your due diligence to ensure that you’re receiving insights from trusted individuals and sources.
Typically, new traders will start by searching content on Forex market related blogs and websites, and absorb as much information as they can. Once they’ve found a specific area of interest within fundamental analysis or technical analysis, then they can dive deeper into these areas by purchasing a relevant course on the topic, and possibly sign on to receive group coaching or one-on-one instruction.
The foreign exchange market is considered one of the most beginner friendly markets to trade. We have outlined 10 major advantages of trading the Forex market, but this is certainly not an exhaustive list. The very first thing that you should do once you have decided to give Forex trading a try is to sign up with a reliable broker and start testing various ideas and strategies on a demo account. After you have reached some level of profitability in your Forex trading within your demo account, then you can consider transitioning to a live account.