Benefits of Forex Trading
The presence of a vibrant over-the-counter Forex market has led to exponential growth in the number of retail traders and investors. Currency markets are no longer the sole preserve of wealthy individuals and large corporations. There are more active retail market participants in Forex than any other asset class, and the inherent advantages are not hard to find.
1. Greater Market Liquidity and Volatility
Liquidity refers to the total number of buyers and sellers in a market. Generally, greater liquidity in a market translates to smoother order flow and narrower the costs for investors. The Forex market is the biggest and the most liquid financial market. Daily activity typically exceeds $5 trillion, with over $1.5 trillion conducted in spot transactions.
Volatility is a gauge of how much the price of an asset changes over time. The major Forex pairs are highly volatile, providing traders with enough daily opportunities to generate returns from even small exchange rate fluctuations.
2. Extended Market Hours
The Forex market is open 24 hours a day, five days a week and can be broken down into four major time zones: the Sydney session, the Tokyo session, the London session, and the New York session. The maximum liquidity is recorded when operational hours in two of the time zones overlap. Trading during those hours increases the odds of an open position meeting its price objective.
3. Lower Costs
The only cost to trade with big Forex brokers is the spread, which is the difference between the bid price and the ask price. Spreads in Forex also tend to be much tighter than those in other securities such as stocks and futures. This makes Forex trading among the most cost-effective ways to participate in financial markets.
4. Availability of Margin
Most Forex brokers offer margin to traders. Margin-based accounts are different from credit accounts in that a trader first has to open an account with a broker and deposit money. Once a margin account has been funded, traders can engage in any market activity as long as they maintain sufficient margin in their account. The initial deposit is dependent on the margin percentage that is agreed upon between the broker and the investor. For accounts trading in 100,000 currency units, the margin requirement is usually 1%. So, if an investor wants to trade $100,000, he will need to deposit just $1000. The broker supplies the remaining 99%. The option to avail such massive leverage can help small-time traders to generate higher returns from the market.
Generate Returns Even in Down Markets
A short position involves selling a currency pair. The ability to execute short trades enables a trader to generate returns irrespective of which way the market is trending. When the exchange rates increase, a trader can generate positive returns by going long on a currency pair, only to sell it later for more than the initial price. Conversely, when exchange rates are falling, a trader can generate positive returns by short selling the currency pair and then buying it back for less than what was initially paid.