8 Key Benefits of Trading Forex

Trading forex lets you profit from currency movements, with the potential to earn high returns. Whether you're just starting or aiming to expand your knowledge, this article can help you understand the basics of forex trading and why so many people choose to trade forex.

Before we get started, here are the 8 key benefits of trading forex:

1. Flexible trading hours
2. Low barriers to entry
3. Profit from both rising and falling markets
4. High liquidity in the market
5. Leverage options
6. Hedging options
7. Low trading fees
8. Lots of supportive community & tools available

Forex, or foreign exchange, is the global marketplace for trading national currencies against one another. It’s the world's largest and most liquid financial market in the world, with the average forex trading volume at around USD 7.5 trillion dollars per day. 

An example of a foreign exchange that applies to most of us is when you travel abroad and exchange your home currency for a local currency, you’re technically making a forex transaction. 

If you have U.S. Dollars (USD) and need Euros (EUR), you must exchange your USD for an equivalent amount of EUR based on the current exchange rate. This rate shows the value of one currency compared to another. If the currency you are exchanging is stronger, you can exchange and get more of the weaker currency. 

However, exchange rates fluctuate constantly due to global economic changes, such as market demands and government interventions. Just because you exchanged a certain amount today doesn’t mean you will get the same amount tomorrow. 

These fluctuations are often minor and are measured in pips, which represent the smallest movement in an exchange rate and are calculated at the fourth decimal place of a price quote.

Here’s what it looks like:

Now that we understand what forex is, let’s take a look at its benefits. 

The forex market operates 24 hours a day, 5 days a week.

This flexibility allows traders from around the world to participate at any time that suits their schedule, whether it’s during the day or night. Trading begins with the Australian session on Sunday evening and ends with the US session on Friday evening. These extended hours are possible because forex transactions are completed over the counter (OTC) rather than through a central exchange like the stock market.

Because it operates 24 hours, it provides an opportunity for the market to react to global events in real-time without having to wait for a market to open.

Forex trading is accessible to everyone, regardless of their financial background or experience level. Traders do not need a massive sum of money to start. Many brokers allow opening a forex trading account with a small initial deposit, sometimes as low as USD 20
Additionally, most forex brokers often provide free demo accounts, which let investors practice trading with virtual money. This enables first-time traders to learn and hone trading skills without risking their own money until they feel confident.

The forex market allows you to make money whether currency prices go up or down.

This is because you can trade both ‘long’ (buying a currency with the expectation its value will increase) and ‘short’ (selling a currency with the expectation its value will decrease). 

For instance, if you believe the EUR will strengthen against the USD, you can buy EUR. Conversely, if you speculate that EUR will weaken, you can sell EUR for USD instead and make a profit from the difference.

The forex market is the most liquid market in the world, with USD 7.5 trillion traded daily. To put this into perspective, this daily trading volume is more than twice the UK’s GDP in 2023.

Because so many people are trading, it is easy to buy or sell currencies quickly. This high level of activity means you can enter and exit trades fast, reducing the risk of being stuck in an unfavorable position.

High liquidity also means that the difference between the buying and selling price (called the spread) is usually very small. This makes it easier to make a profit, as the market price does not need to move much for your trade to become profitable.

This is a factor that can be seen as both an advantage and a disadvantage to new traders. Nevertheless, understanding leverage is crucial for anyone entering the forex market.

Forex brokers offer leverage, which allows traders to control a larger position with a relatively small capital. For example, a leverage ratio of 10:1 means that with just USD 1,000, you can control a position worth USD 10,000.

While leverage can amplify profits, it’s crucial to remember that it can also magnify losses. For instance, if the market moves against your position, your losses can exceed your initial investment. Therefore, leverage should always be used with caution and a well-defined risk management strategy.

Hedging in the forex market is a way to safeguard yourself from financial losses due to currency fluctuations. Businesses and investors use hedging to protect their finances when dealing with different currencies.

For example, a U.S. company expecting payments in EUR may hedge by buying EUR in advance. If the EUR weakens against the USD, the company does not lose money because it has already secured the EUR at a better rate.

There are different ways to hedge in forex:

1. Forward Contracts: Agreements to exchange currency at a specific rate on a future date. They help lock in the exchange rate, so you know exactly what you will get.
2. Options: Financial derivatives that give you the right, but not the obligation, to exchange currency at a specific rate before a certain date. They provide more flexibility than forward contracts.
3. Futures Contracts: Similar to forward contracts, they are standardized and traded on exchanges, making them easier to buy and sell.

Compared to other financial markets, forex trading can offer relatively lower transaction fees. Here's why:

• Spreads: As mentioned earlier, the forex market typically comes with tighter spreads (the difference between the buying and selling price). This means you pay less to enter and exit trades.
• Commissions: Some brokers may charge commissions on forex trades, but these are often lower compared to commissions for stock or options trading.

The FX market has a large and active online community, providing valuable resources for retail traders of all experience levels.

• Educational Resources: Online forums (i.e., Reddit), webinars, and educational websites offer a wealth of information on forex trading strategies, technical analysis, and fundamental analysis.
• Market Analysis and Insights: Many online platforms provide real-time market commentary, analysis, and trading signals from experienced traders.

Social Interaction: Online communities allow traders to connect, share experiences, and learn from each other. This social interaction can be a valuable source of support and motivation.

Start small, manage your risks wisely, and gradually build your confidence and skills. Always prioritize learning and risk management to safeguard your investments and achieve long-term success.