As traders learn more about the forex market, and as they start to use the tools and features of their platform in an effective way, they can begin to realise a number of genuine advantages of forex trading. It’s important to remember that advantages are not guarantees, and there is no such thing as an infallible forex strategy. Despite this, there are many benefits of forex that are not necessarily found in other types of market trading.
Liquidity is a major benefit of trading forex. The forex market is one of the most liquid and volatile financial markets in the world, which means traders have the potential to quickly make profits on their positions. Even short-term scalpers and day traders can make profits in the market, provided that their strategies are effective and their predictions are correct.
Of course, this liquidity means the market can quickly move in the opposite direction too. There is no way to completely eliminate risk in this market, and even the most experienced traders may suffer significant losses.
An important advantage of trading forex is the potential to make a profit even across different market conditions — although it should be noted that profits are never guaranteed, regardless of past market performance.
Traders can decide to go long on a trade, which means they open a buying position in the anticipation that the value of a currency will increase over time. If this value does in fact increase, they will receive a profit. Alternatively, traders can open a selling position — also known as going short — if they expect that the value of the currency will fall during their trading window. If their prediction is correct, they will take a profit.
This enables flexible trading whether the market is growing or declining, giving traders more choice. There is always the risk that the market will move in the opposite direction, however, and traders should act cautiously and conservatively when they approach the FX market.
It certainly takes time and effort to learn how to trade forex effectively, and traders
should be willing to research and grow their experience in the long term, but it is still relatively easy to start out trading FX. This important benefit of forex trading can be easily achieved with a trading platform’s demo account.
With a demo account, users can access all of the tools and features that are available on the trading platform. They can view performance data, analyse the market in real-time, and make practice trades as part of their education and development. There is only one difference between a demo account and a live trading account — the risk. With a demo account, there is no risk, as no capital is required. This means there is no potential for profit, but no potential for losses either.
Traders should use the demo version of the platform to familiarise themselves with the forex environment. After they have grown confident in the market, they can graduate up to a live account and begin trading for real.
While changes happen quickly in the forex market, and currency prices change on a second-by-second basis, these movements tend to be small in the short term. When traders open their positions only for a short time, their market exposure is low — which means their potential profits and potential losses will be low too.
It is possible to increase this level of exposure through a process known as leverage. Leverage in forex basically means to supplement the trader’s own capital resources with borrowed capital. This enables the trader to control positions worth far more than their own resources will allow — a significant forex benefit for experienced traders.
Leverage is generally presented as a ratio. For 10:1 leverage, $10 is borrowed for every $1 taken from the trader’s own capital, and the trader controls a position worth 10x the amount they would have controlled otherwise. The leveraged capital will need to be paid back whether the trade results in a profit or not, which means traders need to take great care when using leverage.
One of the reasons why forex trading has become so popular is its potential for diversity. Traders have a wealth of different choices at their disposal when they approach the FX market. These include the following:
An FX option is a contract that locks in place a set currency value for the duration of the trade. Once the contract reaches maturity, the trader has the option to complete the transaction, giving this derivative its name.
FX futures are similar to options in that the currency value is locked in place for the duration of the contract. The futures derivative is a standardised contract traded on an exchange, and the trader is obliged to complete the transaction once the contract reaches maturity.
FX forwards also lock in a currency value over a set period of time, and — like with FX futures — there is an obligation to complete the transaction at the point of maturity. However, unlike futures, these derivatives can be customised to meet the needs of traders.
With an FX swaps derivative, there is still a time element, but the trade is executed at the beginning of the time period. A set amount of one currency is exchanged for an equivalent amount in another currency, and interest is paid on the trade. At the end of the swap period, the exchange is reversed.
Spot trading is not an FX derivative, as it is based solely on the current market value of the currency in real-time. However, spot prices provide some of the underlying data to the forex derivatives listed above.
As traders grow their experience and become familiar with using their forex platform’s dashboard, they can begin to achieve insight and understanding at a glance. With an intuitive and clearly presented interface, the trading platform will provide real-time information on the performance of currencies in the foreign exchange market. This in turn helps users to unlock numerous trading benefits as they develop into confident traders.
FX price movements are measured in pips. Pips in FX are small movements at the fourth decimal place of the currency value — or at the second decimal place in the case of quote currencies with a smaller denomination, such as the Japanese yen. Reading these movements, and analysing previous movements in the marketplace, gives users the opportunity to maximise the forex trading benefits they encounter.
As well as diversity in trading styles and derivative types, there is also diversity to be found in the currencies themselves. Currencies from all over the world are found on the forex market, and traders will be able to take advantage of this as they open and close positions.
From major pairs like AUD/USD (bringing together the Australian Dollar and the United States Dollar) to less commonly traded pairs like the EUR/TRY (the European Euro and the Turkish Lira), the forex market represents a wealth of potential for traders.
The trading day is finite, and there are opening and closing times — for instance, the market will be closed at the weekend. However, during the week the market is open 24 hours a day. As forex is of global interest, trades are always being made. Even in the middle of the night in Australia, the European and American markets will be experiencing daytime trading rushes.
This means the liquidity discussed above is an ever-present feature of the market during the trading week. Users often find this a useful benefit of trading forex, as they can build their strategy around their own schedule.
Enjoy the many benefits of trading with VT Markets
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