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Forex Trading Benefits for the Discerning Investor
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Posted on February 17th, 2022
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Forex Trading Benefits for the Discerning Investor

 

When choosing which market to invest in,traders look for optimal trading conditions and the best risk/rewardratio. Traders around the world chose the foreign exchange marketbecause they believe it meets these criteria. Here are our top sixbenefits of forex trading.

Extended trading hours

The forex market is open 24 hours a day, five days a week, from 10p.m. Sunday to 11 p.m. Friday (CET time). These long opening hours arepossible because transactions are carried out over the counter (on anOTC basis), not through an exchange.

As one trading session closes, in London for example, another opensin New York. This means you’ll always benefit from the different tradinghours of the active forex sessions since the forex market is global.

Forex Trading Benefits for the Discerning Investor

Deep liquidity

The foreign exchange market is the most liquid in the world, wellahead of stocks and cryptocurrencies. Every day, the FX market sees anestimated trading volume of over $5 trillion according to the Bank for International Settlements. This means you'll always find someone looking to take the opposit side of your trade.

High liquidity also means that transactions complete quickly andeasily, so transaction fees (also known as spreads) are often very low.This will allow you to profit from only small changes in prices, asyou'll be able to generate a profit faster the lower the spreads.

Volatility

The high volume of daily currency transactions is estimated inbillions of dollars exchanged every minute, which makes the pricevariations of certain currencies extremely volatile. Huge profits arepotentially achievable by speculating on price movements in eitherdirection. However, volatility is a double edged sword, the market canquickly turn against you, which means it’s important to limit exposureusing risk management tools.

Leverage to maximize profits

Leverage makes it possible to achieve significant profits from asmall investment. For example, you could open a $100,000 position with adeposit as low as $1000. This initial deposit is called the margin, orsimply margin. This example amounts to leverage 100 times your initialdeposit. But some of the best UK Forex brokers may be able to increase this to 500 times.

However, be mindful that leverage is a double-edged sword. It canmagnify your potential profits when the market moves in your favour, andcan significantly increase your potential losses when the market movesagainst you. You may experience a margin call, and the total closure ofyour account if you are unable to deposit additional funds in order tomeet that call.

The ability to open long or short positions

Short selling is part and parcel for the foreign exchange market.While you can take short positions in other markets using derivativessuch as Contracts for Difference, forex trading always involves sellingone currency (the quote currency) to buy another (the base currency,also known as the reference currency).

Lets consider the EUR/USD pair: EUR is the reference currency and USDthe quote currency. If the price of the pair is at 1.13515, then oneeuro is equivalent to a price of 1.13515 dollars. If you think the eurowill appreciate against the dollar, you go long on the pair (you shouldbuy).

If you think the Euro will depreciate, you go short on the pair (youought to sell). Your gains or losses will then depend on the positionsyou have chosen to take, in other words, it is possible to make a profitwhether the market is going up or down, as long as you are on the rightside of the trade.

Low correlation with other asset classes

Diversification is a hallmark of investing. Most investors seek assetclasses that are weakly correlated to one another, in order todiversify risks. For several decades, investors used what has come to beknown as a 60/40 portfolio to hedge their positions - this entailsinvesting 60% in stocks and the remainder in bonds. When the economy isstrong, equities tend to out-perform bonds, and vice versa when theeconomy slows.  This has helped smooth returns over time.

However, with interest rates around the world set to rise, andcentral banks now looking to withdraw monetary support, stocks and bondsare coming under pressure at the same time. Rising interest ratesreduce stock prices by diminishing the value of future dividendpayments. Bonds are affected the same way, as higher interest rates makefixed coupon payments worth less today.

In contrast, the foreign exchange market isn't affected by changes inthe absolute level of interest rates. Traders only care around relativedifferences in interest rates between countries. As the Fed is expectedto raise rates faster than the ECB, the US dollar has appreciated in2021 and into 2022. If stocks and bonds continue to struggle in the faceof rising rates, investors may appreciate the relative safety of theforeign exchange market.

 

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