Why Trade Forex and How Profitable is it?
Why should we prefer trading in forex?
When traders choose which market to trade, they’re trying to find optimal trading conditions and therefore the best chance of taking a profit. There are many reasons why millions of traders across the world think that the forex market fits these criteria, but we are going to focus on the top nine benefits of forex trading:
A. Ability to go long or go short
While you’ll go short on other markets by using derivative products, like CFDs, short sale is an inherent part of trading forex. This is because you’re always selling one currency (the quote currency) to shop for another (the base currency). The price of a forex pair is what proportion one unit of the bottom currency is worth within the quote currency.
● For Instance:- within the forex pair GBP/EUR, GBP is that the base currency and EUR is the quote currency. If GBP/EUR is trading at 1.12156, then one pound is worth 1.12156 euros. If you think that the pound goes to extend against the euro, you’d buy the pair (going long). If you think that the pound will decrease in value against the euro, you’d sell the pair (going short). Your profit or loss will depend upon the extent to which you get your prediction right, meaning it’s possible to profit whichever way the market moves.
B. Forex market hours
The foreign exchange market is open 24 hours a day, five days a week – forex can be traded from 9pm Sunday to 10pm Friday (GMT). These long hours are because forex transactions are completed between parties directly, over the counter (OTC), instead of through a central exchange. And because forex may be a truly global market, you’ll always cash in of various active session’s forex trading hours.
It is important to recollect that the forex market’s opening hours will vary in March, April, October and November, as countries shift to sunlight savings on different days.
C. High liquidity in forex
The FX market is the most liquid market within the world, meaning there are an outsized number of buyers and sellers looking to form a trade at any given time. Each day, over $5 trillion dollars of currency is converted by individuals, companies and banks – and therefore the overwhelming majority of this activity is meant to get a profit.
The high liquidity in forex means transactions are often completed quickly and simply , therefore the transaction costs – or spreads – are often very low. This creates opportunities for traders to speculate on price movements of just a few pips.
D. Forex volatility
The high volume of currency trades each day translates to billions of dollars every minute, which makes the price movements of some currencies extremely volatile. You can potentially reap large profits by speculating on price movements in either direction. However, volatility may be a double-edged sword – the market can quickly turn against you, so it’s important to limit your exposure with risk-management tools.
E. Leverage can make your money go further
CFDs are leveraged, which can make your money go further. Leverage in forex enables you to open an edge on the currency market by paying just a little proportion of the complete value of the position up front.
The profit or loss you create will reflect the complete value of the position at the purpose it’s closed, so trading on margin offers a chance to form large profits from a relatively small investment. However, it also can amplify any losses, meaning losses could exceed your initial deposit. For this reason, it’s important to think about the entire value of the leveraged forex position before trading CFDs.
- Trade a good range of currency pairs
Forex trading gives you the chance to trade a good sort of currency pairs, speculating on global events and therefore the relative strength of major and minor economies.
With IG, for instance , you’ll choose between over 90 currency pairs, including:
Major currency pairs, eg GBP/USD, EUR/USD, and USD/JPY
Minor pairs, eg USD/ZAR, SGB/JPY, CAD/CHF
Emerging currency pairs, eg USD/CNH, EUR/RUB and AUD/CNH
Exotic pairs, eg EUR/CZK, TRY/JPY, USD/MXN
- Hedge with forex
Hedging may be a technique which will be wont to reduce the danger of unwanted moves within the forex market, by opening multiple strategic positions. Although volatility is a component of what makes forex so exciting, hedging are often an honest way of mitigating loss or limiting it to a known amount.
There are a spread of strategies you’ll use to hedge forex, but one among the foremost common is hedging with multiple currency pairs. By choosing forex pairs that are positively correlated, like GBP/USD and EUR/USD, but taking positions in opposite directions, you’ll limit your downside risk.
- For instance , a loss on a brief EUR/USD position might be mitigated by an extended position on GBP/USD.
Alternatively, you’ll use forex to hedge against loss in other markets, like commodities.
- For instance , because the USD/CAD generally has an inverse relationship with petroleum , it’s commonly used as a hedge against falling oil prices.
Why should Trader prefer forex rather than stocks?
Your decision about whether to trade forex or stocks on leverage should be supported which asset you’re curious about trading – currencies or shares. However, there are a couple of reasons why some traders like better to trade forex than stocks:
- Market opening hours: the stock exchange is restricted to an exchange’s opening hours, whereas the forex market is open 24-hours each day . However, it’s worth noting that certain stock indices are available for weekend trading
- Higher liquidity: the forex market sees a mean daily turnover of $5 trillion, whereas the stock exchange sees comparatively fewer traders per day.
- Greater volatility: the stock exchange tends to possess more stable prices that change over an extended period of your time . Although this is often an excellent thing for a few trading styles, the volatility of the forex market can create an exciting range of opportunities for shorter-term traders
NOTE:- When you are deciding whether forex or the stock exchange is best for you, you ought to consider your attitude to risk and your financial goals.