Foreign exchange trading—also known as currency trading, forex trading, and FX trading—refers to opening currency futures (venue: futures market) or buying one currency in exchange for another (venue: forex market) for profit.
The forex market handles greater forex trading volumes, and the forex market is, in fact, the biggest global financial marketplace, with its daily average turnover of $7.5 trillion, according to the 2022 Triennial Central Bank Survey by the Bank of International Settlements.
In any case, many trading platforms provide access to both futures and forex markets, so you can choose whichever venue aligns with your strategy and preference. Forex trading is thus highly accessible and easy to learn, among other benefits.
The Benefits of Forex Trading
Forex trading is open 24 hours a day, is highly liquid, permits leveraging, and offers diverse trading opportunities, especially in the forex market, where trading is not restricted to the major currencies.
1. High Liquidity and Market Accessibility
Unlike traditional markets, the forex market is open around the clock, five days a week; it closes only on weekends. This means you can trade currency at any time, whichever suits your requirements and time zone.
Liquidity is another major draw. Trillions of dollars change hands daily, over the counter, in the forex market, so you can buy and sell currency (nearly) instantaneously and enter and exit trades swiftly.
Liquidity is crucial in forex trading, particularly during times of high market volatility, because it minimises the risk of slippage. Slippage happens when the price at which your order was executed is different from the price indicated when you placed your order. Liquidity also leads to narrower spreads—the difference between the bid and ask prices and the cost of executing a forex transaction—contributing to a bigger profit.
2. Leveraging Opportunities
You can trade on leverage in forex and control a large position by depositing only a fraction of the capital your position requires. For example, at a leverage of 10:1, you can command a $10,000 position with a mere $1,000 margin deposit.
Leverage amplifies your money’s reach and impact, and if your speculation pans out, you profit from your $10,000 position, not your $1,000 margin. With leverage, you can make bigger trades than your current level of liquidity may allow.
That said, remember that leverage can amplify shortfall just as much as it can profit. If you incorrectly predict exchange rate movements, you will lose not only your deposit but also your entire position. Approach leverage with caution, especially if you’re just starting.
3. Profit Potential in Bull and Bear Markets
In forex and other trading activities, you can profit from market upswings and downturns. In a bull market where the value of a currency is rising or expected to increase, go long. If you predict a bear market or a weakening currency, sell short instead.
In trading, you can gain substantial returns if you correctly anticipate exchange rate fluctuations. This is what sets trading apart from investing. You do the former to realise a profit from short-term movements, whereas you do the latter to reap gains from capital appreciation. As a case in point, when you buy gold online, you invest because your purchase is made with the expectation that the value of gold will increase over time.
You may still speculate on gold prices (i.e., trade in gold). Instead of buying gold bars or shares in gold mining companies (which are investing activities), you can buy and sell gold derivatives like gold futures, options, exchange-traded funds, and contracts for difference.
4. Diverse Trading Options and Pairs
The forex market offers a wealth of currencies beyond the big ones like EUR/USD and GBP/USD. The USD comprised 88% of all FX pairs in April 2022, as the BIS reported in that year’s Triennial Central Bank Survey.
Even so, it’s good to have more currency-pair options because then you can explore less common combinations, such as AUD/SEK (Australian dollar/Swedish krona), CHF/SGD (Swiss franc/Singapore dollar), and EUR/TRY (Euro/Turkish lira) and tap into emerging economies and niche markets.
Ultimately, the option to invest in many currencies translates to better diversification and enables you to reduce your exposure by spreading trades across different regions and economic conditions.
5. Low Entry Costs
Starting in forex doesn’t require a hefty initial investment, and many brokers will let you open an account with minimal capital. The high liquidity leads to narrow spreads (see above), so transaction costs are consistently low. These translate to reduced costs and a lower barrier to entry, which means you can dabble and experiment in FX trading without putting your savings on the line.
Forex Trading—It’s Worth It
Forex trading provides you with a versatile and dynamic way to engage in global financial markets, whether through venues like the futures market or the OTC forex market. Its unique benefits—such as high liquidity, round-the-clock accessibility, and the ability to utilise leverage—create opportunities to profit from both the strengthening and weakening of currencies.
The wide range of currency pairs available also allows for portfolio diversification even as the relatively low capital requirement and narrow spreads make it more approachable to beginners. Indeed, with its flexibility and potential for profit, forex trading is an attractive trading option.
