The forex market is the largest financial market in the world, with around $5 trillion going through it every day. Its popularity is not by chance, there are several factors that weigh in its favour when comparing it to other financial markets.
The very fact that it is so large is a reason that traders like to trade the FX market. See our list of the top benefits Forex trading has over other products.
High liquidity (instant execution)
As mentioned, the fact that the market is so large means that there are a huge number of buyers and sellers in the market. With more participants in the market it is easier to buy and sell at the price you want and means the market is highly liquid.
This is great for those traders who are regularly in and out of the market because their trades are executed instantly. It also helps with traders’ risk, with instant execution you can better manage your risk as you know where you will enter and exit the trade and therefore requiring less leeway on your stop loss and take profit orders.
An illiquid market is prone to gapping over stop loss orders, which can throw your risk management out of the window.
Forex open hours
Another huge benefit of the Forex market is that it is open 24 hours a day, 5 days a week. It opens from 5pm EST on Sunday and closes 4pm EST the following Friday.
This means that despite where you are based in the world you can actively trade the market at a time that’s convenient to you. Being a global market and open 24 hours a day, encourages more participants as they can trade during their time zone. Should someone from the Asian time zone want to trade the US stock market, they would need to make they have access during the US session, which is far from convenient.
There are four main trading sessions during a day:
- Sydney 5pm to 2am EST
- Tokyo 7pm to 4am EST
- London 3am to 12pm EST
- New York 8am to 5pm EST
FX trading: Long and short
When trading the FX market, you are speculating on the exchange rate between two currencies. Therefore, whenever a transaction is conducted, there is always a short position in one currency and a long position in the other. This means that you can profit from the FX market despite the direction you think it will go, giving you more trading opportunities.
The emergence of derivative trading makes going short even easier because you can leverage your position and don’t need to actually own the underlying asset before you sell it.
The forex market offers plenty of volatility for traders to profit from price fluctuations. Given the amount of currencies available to trade, each one will offer a level of volatility and you can trade one against any other (assuming your broker offers them).
There are a huge number of variables that can impact volatility in the market. Macroeconomics, microeconomics and geo-political risk will all affect the market volatility and with no two days the same, there will always be opportunity for traders to profit from price swings.
Ultimately, traders need volatility in a market to profit otherwise their investment will act the same way an interest free bank account works.
Hedging is used to reduce risk. You can use Forex to hedge against your portfolio of other products, or you can use forex to hedge other currency positions.
If, for example, you have bought EUR/USD, AUD/USD and sold USD/CAD, you will find yourself reliant on USD weakness. To mitigate the risk of USD strength, you can buy USD in another currency pair (perhaps selling GBP/USD), this would offset any losses should the USD show strength.
Easy to get started & no institutional dominance
The emergence of the internet over the last 30 years has made access to the financial markets a lot easier for the masses. It is no longer only for those working in hedge funds and investment banks because now anyone can now open a brokerage account and trade using derivatives.
It is also difficult for these institutions to influence the forex market like they perhaps can in other markets. In other smaller markets, some large institutions can influence the price by the volume they trade, whereas in the FX market the same institutions are just a drop in the ocean.
Generally, there are no commissions, the only case when there are is when trade volumes are large. Since there is no central exchange, no clearing or exchange fees are charged to traders.
The main cost comes in the transaction fee, which is a spread paid to the broker executing the trade. Spreads across brokers are normally very competitive, which help to drive down costs for traders.
As you can see there are a lot of benefits to trading the forex market. It is often seen as a great gateway market for novice traders, the liquidity and open hours the FX market offers make it great for people learning as they can execute trades comfortably before or after their normal job.
Even if you don’t intend to actively trade the forex market, it can be a useful tool in hedging other products, so we would always recommend that you use a broker that can offer some sort of exposure to the forex market, that way you don’t need to change broker should you change your mind and want to open an FX position.
For a list of our preferred brokers, see out top Forex brokers here.