Why trade forex?
Aside from being the world’s most accessible financial market, there are many benefits and advantages to trading forex.
In this lesson, you’ll learn why you should consider trading forex. We’ll uncover the unique features that set forex apart from other markets and the flexibility it offers.
Here’s why so many people are choosing this market:
No commissions
No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail forex brokers offer a “standard account” which typically does not charge a separate commission.
Instead, the broker’s compensation comes from the spread, which is the difference between the buying (ask) and selling (bid) price of a currency pair.
For high-volume or experienced traders who prioritize tighter spreads, there are “raw spread accounts” that do charge a commission per trade. The commission is usually a fixed amount per lot traded or a percentage of the trade volume.
Some brokers offer both types of accounts, allowing you to choose based on your preferences.
If you’re a beginner or a low-volume trader, a standard account is usually more straightforward.
No fixed lot size
In the futures markets, lot or contract sizes are determined by the exchanges. For example, a standard-sized contract for silver futures is 5,000 ounces.
In forex, you can trade smaller lot sizes or position sizes.Here’s a breakdown of how lot sizes typically work with brokers:
- Standard Lot: 100,000 units of the base currency.
- Mini Lot: 10,000 units (0.1 of a standard lot).
- Micro Lot: 1,000 units (0.01 of a standard lot).
- Nano Lot: 100 units (some brokers offer this even smaller option)
Most platforms allow you to enter any lot size you want, as long as it meets the broker’s minimum and maximum trade size requirements.
This gives you the flexibility to adjust your position sizes based on your risk tolerance and trading strategy.
Low transaction costs
The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions.
For larger transactions, the spread could be as low as 0.07%. Of course, this depends on your leverage, and all that will be explained later.
The lowest transaction cost isn’t always the best option though. Consider factors like regulation, customer service, platform features, and educational resources when choosing a broker.
And be wary of brokers promising “zero spreads.” There are always costs involved in forex trading, whether through spreads, commissions, or other fees.
A 24-hour market
Forex brokers typically allow trading 24 hours a day, five days a week. This is because the forex market is decentralized and operates across multiple time zones globally
There is no waiting for the opening bell. From the Monday morning opening in Australia to the Friday afternoon close in New York, the forex market never sleeps.
This is awesome for those who want to trade on a part-time basis because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.Just keep in mind that while the market is open 24/5, trading volume and liquidity can vary depending on the session.
And some brokers may have specific restrictions on trading hours due to technical maintenance or regional regulations.
No one can corner the market
The forex market is the largest and most liquid financial market globally, with trillions of dollars traded daily. It’s decentralized, meaning it operates across multiple exchanges and doesn’t have a single central authority.
The FX market is sufficiently liquid that significant manipulation by any single entity is all but impossible during active trading hours for the major currencies.
It’s incredibly difficult for any single entity to control or manipulate prices. Not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.
There have been instances where large financial institutions or governments have tried to influence currency prices, but these attempts are usually short-lived and often result in significant losses for those involved.
So while individual traders or groups may temporarily impact specific currency pairs through large trades, the sheer size and complexity of the forex market prevent anyone from truly cornering it.
Leverage
Forex brokers commonly offer leverage. Leverage is a tool that allows traders to control a larger position in the market with a smaller amount of capital. It is often expressed as a ratio, like 50:1 or 100:1.
In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.
The amount of leverage offered by brokers is often regulated by financial authorities to protect traders. In the US, for example, the maximum leverage allowed for major currency pairs is usually 50:1.
For example, if a forex broker offers 50-to-1 leverage, this means that a $100 dollar margin deposit would enable a trader to buy or sell $5,000 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars, and so on.While this is all gravy, let’s remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
Deep Liquidity
Deep liquidity refers to a market where large volumes of assets can be bought or sold quickly with minimal impact on price. This means there are always plenty of buyers and sellers willing to trade at any given time.
Because the forex market is so enormous, it is also extremely liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse, you can instantaneously buy and sell at will.
Unlike stock markets, which are centralized on specific exchanges, the forex market is decentralized and operates through a network of banks and electronic communication networks (ECNs). This structure ensures that liquidity is distributed across multiple venues, reducing the risk of bottlenecks
You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).
Low Barriers to Entry
Online forex brokers make it easy to open an account and start trading from anywhere with an internet connection. There are numerous platforms and tools available to facilitate trading.
You would think that getting started as a currency trader would cost a ton of money. The fact is, when compared to trading stocks, options, or futures, it doesn’t.
Compared to other markets, forex brokers often allow you to start trading with a relatively small amount of money. Some brokers even offer micro or cent accounts, where you can trade with fractions of standard lots, making it more accessible for beginners with limited capital, and only require a minimum account deposit of $50.
We are NOT saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn’t have a lot of start-up trading capital.
Free Stuff Everywhere!
Forex brokers offer various freebies and promotions to attract and retain customers.
Almost all forex brokers offer free demo accounts. Demo accounts are very valuable resources for those who are “financially hampered” and would like to hone their trading skills with “play money” before opening a live trading account and risking real money.
These allow you to practice trading with virtual money, giving you a risk-free environment to learn the platform, test strategies, and get a feel for the market.
Many brokers provide educational materials like webinars, ebooks, articles, video tutorials, and even live training sessions
Some brokers offer free trading tools like technical indicators, economic calendars, charting software, and even trading signals generated by their research teams or third-party providers.
And guess what?! They’re usually all free!
Now that you know the advantages of the forex market, see how it compares with the stock market!
