The foreign exchange market, also known as forex or FX, is the world’s largest financial market. According to the Bank for International Settlements, the average daily turnover in the global forex markets is US$5 trillion. It dwarfs other markets such as equities (US$194 billion) and bonds (US$761 billion).
Why is forex trading a good investment?
One reason for forex’s popularity is that traders can use leverage to take on more prominent positions than they would otherwise afford. For example, most forex brokers offer 50:1 leverage, meaning that a $50 margin deposit would allow a trader to take on a position worth $2,500. This ratio of 1:50 is much higher than the 2:1 leverage commonly provided on equities trades.
The higher your leverage, the more vulnerable you are to losses and gains. Before deciding to invest in foreign exchange or any other form of trading, you should think about your investing goals, level of expertise, and risk tolerance. The possibility does exist that you may lose some or all of your initial investment, so you should not put money into something you cannot afford to lose. If you have any concerns regarding foreign exchange trading, seek advice from an independent financial advisor.
Another advantage of the forex markets is their liquidity. It means that there are many buyers and sellers in the market at any given time. Due to many participants, the vast geographical dispersion and 24-hour trading.
Much liquidity means that prices can change rapidly in response to news and short-term events, making forex an exciting market to trade. It also means that it is relatively easy to enter and exit trades, even on short-term timeframes such as 60 seconds.
Volatility refers to the size of price movements. In general, markets with higher volatility tend to be more unpredictable and risky, which also means they offer more significant profit potential. The foreign exchange market is particularly volatile, so that that currency prices can fluctuate wildly from one day to the next.
This unpredictability can make forex trading both exciting and challenging and provide opportunities for profitable trades. However, it is essential to note that excessive leverage can magnify losses just as much as increase profits.
Deep and liquid market
The fx market is deep and liquid. There is always a buyer or seller for any currency pair, no matter what time it is. Many participants ensure that prices are kept fair and transparent, with no single market-maker able to control the market price for long.
Another great advantage of forex trading is its accessibility. Unlike other financial markets, the forex market is open 24 hours a day, five days a week (from Sunday evening to Friday night). It means that you can trade at any time of day or night, from anywhere.
All you need is an internet connection and a computer or mobile device. There is no need for expensive data feeds or software subscriptions. You can even trade on the go with most forex brokers’ mobile apps.
No commissions or fees
Most forex brokers don’t charge any commissions or fees per trade. Instead, they make money from the “spread”. Spread is the difference between the bid/ask prices. If the EUR/USD bid price is 1.2050and the asking price is 1.2051; the spread would be 0.0001, or 1 pip.
It might not seem much, but it can add up quickly, especially if you are trading for a short period of 60 seconds. Some brokers charge commission on specific instruments, but this is usually a tiny amount, often less than $10 per trade.
Free demo accounts
If you are new to forex trading, most brokers offer free demo accounts, which you can use to practice trading with virtual money. It is a great way to learn about the market and test out your trading strategies without risk.
If you’re interested in testing forex trading on a demo account, check out Saxo Bank.