Benefits of forex trading
Currency trading (forex) is a global market that is extremely liquid, and has a large daily trading volume. Although forex trading may not be for the faint of heart or the inexperienced trader, once you learn how to trade, there are some unique advantages to it over other markets.
Benefits of forex trading: For five days, it’s a 24-hour market
Forex trading is almost continuous as long as there is a market open somewhere in the world, since the forex market is worldwide. Trading hours start in the U.S. when the first major market, Sydney, Australia, opens at 5 p.m. Eastern time on Sunday. Trading ends on Friday, at 5 p.m. Eastern time, when the last major market, New York, closes.
A high level of liquidity is present
It refers to the ability of an asset to be converted quickly into cash. Due to the high liquidity in forex trading, large amounts of money can be moved in and out of currencies with relatively small spreads—the difference between the bid and ask prices between buyers and sellers.
Benefits of forex trading: Low transaction costs
Typically, forex brokers pocket the spread as their payment for facilitating trades on the forex market. Spreads are built into the price of the trade.
For most currencies, a pip is the fourth place after the decimal point, or 1/100 of a percent. (For the Japanese yen, a pip is the second place after the decimal point, or 1%.)
Using the example above, the spread for the transaction would be 2 pips if the bid price was 1.3244 and the ask price was 1.3246.
In addition to a flat fee or a percentage of the transaction amount, brokers may also charge a commission.
Benefits of forex trading: Leverage is a powerful tool
Forex brokers often allow traders to buy and sell in the market using significant amounts of leverage, allowing them to trade with more funds than what is actually in their accounts. With 50:1 leverage, for example, you could trade $50 for every $1 in your account. With only $1,000 of capital, you would be able to trade $50,000.
Rising and falling prices offer profit potential
Directional trading is not restricted in the forex market, so you can buy (or go long) a currency pair if you believe it will increase in value, and you can sell it (or go short) if you believe it will decrease in value.
You always buy one currency and sell the other no matter what currency pair you’re trading. For example, if you trade a currency pair, you’re buying one currency and selling the other. If you expected the value of the first currency, known as the base currency, to increase in comparison to the value of the second currency, known as the quote currency, you would buy that pair—that is, buy the pound and sell the dollar. The pound would be sold and the dollar bought if you expected the value of the pound to decrease in comparison with the dollar.
The forex market is very different from the stock market in which you have to borrow shares to short sell them. In the forex market, you simply place a sell order to sell a currency you do not own.