If you are considering trying your hand at Forex trading, you will probably want to know the benefits of this form of investment before visiting a site like www.forexbrokersreviews.com to choose the right broker to meet your needs. In this article, we look at the advantages of Forex trading as well as the main market participants and some of the key factors to bear in mind when starting out in the financial markets.
Benefits of Trading Forex
There are numerous benefits to trading in foreign currencies. Here are some of the main advantages that attract people from all over the world to this form of investment.
Liquidity and Market Hours
The Forex market is open for trading 24 hours per day, 5 days per week. The greatest liquidity is experienced when the market is open in multiple time zones at once.
The cost of trading with the majority of Forex brokers is the Spread, which is the difference between the Ask price and the Bid. Forex market spreads are usually tighter than those found with other securities like stocks, and this makes Forex trading a cost effective investment solution.
Margin Based Trading
The majority of Forex brokers offer a margin based trading account which is different from a credit based account as it requires the client to open a live account with a broker and then to deposit funds in order to trade. Leverage enables the client to trade a larger position that they could otherwise afford based on the actual balance of their account.
Potential for Profit Whatever Direction the Market Takes
Short selling is possible in the Forex market and this allows the trader to make a profit whichever way the market trends. If rates are increasing, traders can buy currency pairs and sell them at a later time for a higher amount, or alternatively, if rates are falling, profit can be made from selling a currency pair and then buying it later for a lower amount.
Leverage is based on the broker’s margin requirements and is expressed as a ratio. This means that if, for example, the broker requires the client to have a minimum of a 2% margin in their account, they must have a minimum of 2% of the intended trade’s total value as cash in their trading account before proceeding with placing the order. Traders must be aware of both the advantages and downsides of using leverage. For example, if the investor is offered a leverage of 50:1, they are able to enter a trade for $50 per $1 in their account and this allows them to earn the profits on a trade worth $50,000 with only a commitment of $1000. The problem with this is that the trader also risks losing funds based on a trade of $50,000 and this can add up to vast losses.
Forex Market Participants
Many people participate in Forex trading, however here are some of the main groups:
Travellers and Consumers
Consumers purchase services and goods online from foreign merchants or when abroad using credit cards and the amount paid in the foreign currency is converted into their home currency when they receive their statement. When using cash to buy goods overseas, travellers visit an exchange bureau or bank to convert funds from their home currency into the currency of the country that they are visiting, and an awareness of exchange rates is key to getting a good deal.
Companies often convert currencies when doing business with customers or companies abroad. Multinational companies often convert huge amounts each year.
Speculators and Investors
When dealing in foreign investments like real estate, bonds and equities, speculators and investors use currency exchange services. They also trade in Forex to benefit from the movement in the currency exchange market.
Investment and commercial banks trade in currencies as a service to deposit, lending and commercial banking customers as well as for speculative and hedging purposes.
Central Banks and Governments
Central banks and governments trade in currencies in order to adjust financial or economic imbalances or to improve economic conditions.
Risks Involved in Forex Trading
Although there are numerous benefits to Forex trading, there are some risks to be aware of too. These include:
While using leverage can increase profits by stretching capital further, this brings with it the risk of big losses which can exceed the total margin which the investor holds. It is therefore important to have a strong risk management strategy such as stop losses in order to avoid this happening.
Multiple Market Trades
Traders who trade many markets at once often miss opportunities because of a lack of focus. By narrowing the focus to just a few markets it is easier to spot profitable market moves.
Margin Close Out
When a trader’s account falls below half of its initial margin, all open positions are liquidated immediately in order to guard against the chance of the loss being more than the investment itself. By having a lot of open trades at the same time, an investor increases the chances of this happening so keeping the number of open trades down and by reducing the amount of leverage on the account will help to keep the trader away from margin close out.
Liquidity and Volatility
In a similar way to exchange rates, spreads will fluctuate during risk periods such as around the time of political and economic news announcements when the spreads will widen whereas they will narrow during quieter periods.
While steps are being taken to weed out brokers who are deliberately trying to con investors, unfortunately there are still many online Forex brokers who are unscrupulous and unreliable. When choosing a broker it is therefore important to do your research properly and to choose a trustworthy broker who is regulated by a recognised body as this will protect you from the possibility of your personal and financial details being put at risk as well as from the possibility of losing your investment.