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Why Trade Forex
Why Trade Forex
The financial market consists of many markets of different "specialization", such as the commodity market, the securities market, the foreign exchange market (Forex), the credit market. Each of them has its own bright and dark sides, pitfalls and benefits, and investors prefer to trade in the markets that meet their needs and expectations. The foreign exchange market stands out for its huge daily turnover ($6,6 trillion in 2019) and popularity against the background of other markets. But why is it worth trading in the forex market? Let’s figure it out.
Benefits of Forex Trading
Foreign Exchange, commonly known as Forex, is a network of market participants that trade currencies at determined or current prices.
Also, the Forex market is considered the largest and most traded market in the world. Traders often prefer it to other markets for some reasons, such as good trading opportunities in both bear and bull markets, its availability 24/5, no hidden charges or costs, flexible management of the trading process, high volatility, and so on.
In this article, we'll take a quick look at its main benefits.
Forex Volatility
Volatility shows how abruptly market prices fluctuate. Market volatility is highly dependent on the level of market liquidity: the lower the liquidity, the higher the volatility, and vice versa.
The foreign exchange market contains numerous currency pairs, and the thing is the most traded major currency pairs are more stable in comparison with minor currency pairs.
So, if a swing-trader, scalper, or a daytrader wants to earn on market volatility, they usually trade the most volatile forex pairs such as USD/ZAR, USD/MXN, USD/TRY, CHF/JPY, NZD/JPY, etc.
As we see, currency volatility opens up many new market opportunities. But since the market can change quickly against traders looking to make money from it, they should use risk management tools to prevent losses.
Market liquidity
Forex is the most liquid market due to its daily turnover of over $6,6 trillion. So, it operates enormous amounts of money and gives utmost freedom of opening and closing trading positions at current market quotations.
High liquidity is extremely attractive to every investor because it enables the possibility of entering and exiting the market with any volume. In addition, it allows traders to react almost instantly to any price changes 24/5.
Forex Hedge
Hedging is a way to reduce the risk of undesirable movements in the forex market by opening several positions at the same time. Although volatility makes Forex an especially exciting market, hedging is a good way to limit and mitigate losses.
One of the most common forex hedging strategies is to use multiple currency pairs. If you choose positively correlated Forex pairs, but open positions in opposite directions, you can limit the risk of losses. So, if you lose on a short USD/CHF position, your loss will be offset by a long on USD/JPY.
Forex Leverage
Leverage in Forex is determined by an agreement between the client and the bank (brokerage firm) that provides the client with market access (usually 1: 100). This means, for example, that you can trade volumes up to $ 100,000 by only depositing only 1% of the volume ($ 1,000).
Thus, you get the opportunity to make big money on a relatively small deposit. The use of such large leverage and the strong volatility of currency prices make Forex very profitable (and very risky). IFC Markets offers nice leverage to its clients which can make their money go further.
Forex Trading Hours
You can continue to trade the Forex market even when the sun goes down as it operates 24 hours a day, 5 days a week, regardless of geographic location. The only thing you need is a PC, PDA or any mobile device connected to the Internet.
The foreign exchange market, which is open around the clock, is decentralized, and Forex transactions are made in the over-the-counter (OTC) market.
Take into account, that forex trading hours will vary during a year: in October, November, March and April, when countries shift to daylight saving time.
Since the main foreign exchange centers are located in London, New York, Sydney and Tokyo, each day is divided into 4 major trading sessions, according to the opening hours of the banks.
The opening hours can be seen below:
- New York: 8:00 - 5:00 pm EST
- Tokyo: 7:00 pm - 4:00 am EST
- Sydney: 5:00 pm - 2:00 am EST
- London: 3:00 am - 12:00 pm EST
The best time to trade Forex is when two sessions overlap:
- London and Tokyo: between 3:00 am — 4:00 am EST
- New York and London: between 8:00 am — 12:00 pm EST
- Sydney and Tokyo: between 7:00 pm — 2:00 am EST
Pros and Cons of Forex Trading
Pros | Cons |
Accessibility and promptness | Less regulatory protection |
Low costs | High volatility - high risks |
High liquidity | High leverage - high risks |
Technical strategy | Lack of transparency |
Simple tax rules | Sometimes disadvantageous for small traders |
Wide range of instruments | |
High volatility - many market opportunities | |
High leverage - higher earnings potential |