To start with, forex trading is a form of financial investment through which traders buy and sell currencies. In fact, a forex trade in financial trading involves choosing a currency pair and speculating on its price movement.
Taking the EUR/USD pair as an example, if a trader thinks that euro will strengthen against the U.S dollar and it actually does, then the trader will profit from this trade. If not, the trader will take a loss. Currency trading is important because they allow people to buy goods and services both locally and around the world.
Forex trading can be a good investment option and a rewarding endeavour. It can be an exciting journey irrespective of possible complexities. One needs to bear in mind though that there will always be risks involved.
Read on to learn about the foreign exchange market, the top 10 reasons to invest in forex, what forex trading actually is, how to invest in forex as well as whether you can generate some revenue through investing in forex. Learn about some basic features to look for when choosing a forex brokerage to open an account with.
Is forex a financial market?
The foreign exchange market, or FX market, is an investment market where financial institutions or multinational companies conduct business in foreign countries so as to facilitate the payment of bills in the local currency. Other investors and speculators use the forex market to benefit from exchange rate movements. This financial market is the only trading market in which there is continuous and nonstop trading all around the globe.
Although historically the market was dominated by institutional firms and major banks which traded for clients, investing in forex nowadays is attracting more and more retail-oriented people and average traders and investors. Therefore, there are numerous reasons why one should invest in Forex. Irrespective of being a beginner trader or a professional, getting into forex trading can be a good addition to your investment portfolio in general.
Reasons to place your forex investments
When talking about the reasons to invest in forex, most resources refer to reduced transaction costs, low spreads and flexible leverage. However, these alone wouldn’t make sense to new traders who are just starting out. So, below is a simplified list with the top 10 reasons why forex is a good financial investment.
1. High trading volume
Firstly, compared to other markets, the forex market is the largest investment market around the globe, with $6.6 trillion daily volume according to the Triennial Central Bank Survey of FX and OTC derivatives markets in 2019. Participants of this market are financial institutions such as commercial banks, central banks, money managers, hedge funds, retail brokers, commercial companies and more. In fact, everyone can trade forex.
This makes it the most liquid market as well, meaning that buying and selling currencies is much easier because of the high trading activity and demand for a specific currency pair. Liquidity in forex also means that there is usually no impact on exchange rate and transaction flow is easier while pricing remains competitive.
2. Flexible hours
The market is open 24/5, Monday until Friday, across different time zones, in the biggest financial centres including Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich. This means that when the market closes in the U.S, it opens in Tokyo or Hong Kong. As a result, the market is continuously active, as people can trade anytime, anywhere, with prices changing all the time.
For instance, as “Forex Market Hours” showcase:
- New York opens at 8:00 am to 5:00 pm EST (EDT)
- Tokyo opens at 7:00 pm to 4:00 am EST (EDT)
- Sydney opens at 5:00 pm to 2:00 am EST (EDT)
- London opens at 3:00 am to 12:00 noon EST (EDT)
The most active hours however, which actually occur when two markets overlap, are:
- New York and London: between 8:00 am — 12:00 noon EST (EDT)
- Sydney and Tokyo: between 7:00 pm — 2:00 am EST (EDT)
- London and Tokyo: between 3:00 am — 4:00am EST (EDT)
During overlapping trading hours, trades reach their highest volume and traders have more possibilities of generating some revenue in the foreign exchange market. Nevertheless, there are always many possibilities that traders take a loss.
3. Trade metals on forex
As already noted, you can trade forex through currency pairs, meaning that you buy a currency that is paired with the one you are selling. However, traders can trade gold and silver as well, which is an important forex trading characteristic since gold is considered a safe haven by the majority of investors and the best instrument for investors trying to hedge against possible weaknesses in the equity market etc.
To be exact, when downloading the trading platform, like the MetaTrader4, through the broker you registered with, there will be numerous currency pairs to choose from along with the XAUUSD (gold) and XAGUSD (silver) ones. The former is the gold spot to U.S dollar currency pair and it is considered a safe trade to perform as it is popular for limiting losses during volatile times.
4. Ability to copy trades
The majority of forex brokers offer copytrading platforms nowadays where traders can copy the best performing strategies of top traders. What’s good with copytrading is that beginner traders can actually copy and learn from more experienced traders, potentially profit from their strategies and as a result boost their trading portfolio. There might also be losses though if the other trader takes a loss. Investors can also have full control over their trades and enter or exit a trade when they wish.
5. Potential returns
While we’ve already talked about the possible risk involved in losses when trading forex, especially because of the market’s volatility, there’s also potential for higher returns when trading if volatility is correctly harnessed. Your trading strategy and how you diversify your trading portfolio will play a key role in managing this risk. If you keep multiple alternatives in place, your financial investments will less likely be affected.
6. Invest in Managed Private Forex Funds (MPFFs)
MPFFs as the name suggests are forex funds managed by professional forex traders and make the whole process much easier as trading requires time and patience. Traders have the option of investing in a forex fund and having the work done for them.
Those traders that are too busy researching and understanding how things work but would like to generate some revenue, can make use of MPFFs. This option can be as successful as trading on your own.
7. Suitable for both newbies and professionals
Being accessible to pretty much everyone is one of the key features of this investment market. Whether you have years of trading expertise or are just starting, experience is not a prerequisite. With the right broker in place, which provides you with all the necessary resources and tools, you can gradually build your portfolio and learn as you go.
8. Trade with little funds
Compared to shares investment and other famous instruments like bonds, you can get started with forex with as little as $100. Of course, your potential earnings will be small, but so will your potential losses. Most brokers though offer leverage to their traders, meaning that they can trade with bigger amounts compared to what they’ve initially deposited in their trading account.
9. No central marketplace
Unlike shares investment, which are open during specific hours daily only, forex investments do not limit your trading times. Actually, foreign transactions occur in a non-central marketplace, electronically over the counter (OTC), meaning that all those participants mentioned above trade via computer networks rather than on one centralised exchange.
The large number of participants internationally suggests that there’s no one controlling the market. However, on the contrary, the market is impacted by the world’s economy in general.
10. Practise on a demo account
Traders can always practise on a demo account, which most brokers offer, and then trade on a real account once they feel more confident. This risk-free choice is a nice practice and a good source of education as traders get to learn “for free”.
How to invest in forex?
Investing in forex is quite simple. In a more broader sense, your financial trading would be the sale of a currency and purchase of another. The currency pairs are quoted in the form of a base and quote currency. Taking the EUR/USD currency pair as an example once again, the EUR is the base currency whereas the USD is the quote currency. The euro will be sold to buy the dollar. Traders do this in the hope that the dollar’s value will increase and give the euro more value once returned.
Now moving to a real-world example, let’s say we have the GBP/AUD currency pair. If you travel from Britain to Australia, you will probably want to exchange pounds to Australian dollars so as to spend local money. Let’s imagine the exchange rate is 1.89 at that time but you didn’t spend some Australian dollars and want to exchange them back to pounds. Since the market constantly changes, if the exchange rate is now higher, it means that the AUD has increased in value and you can buy more pounds with less Australian dollars. As a result, you generated some profit because of the currency pair’s change in value.
Trading on the forex market is very similar to the example above, but without travelling. Positions are opened from the trader’s home or from anywhere worldwide, through a forex trading account.
- Choose a currency pair
- Study the market
- Read the quote
- Select your position (buy/sell)
Which broker is the best for forex investments?
There is no good or bad broker in this investment market but rather a suitable or less suitable one. It really depends on your requirements and skills. However, there are some main features to look for when looking for a brokerage to open an account with:
- A reliable and trustworthy broker
- Have a variety of trading instruments
- Have a variety of trading accounts
- Offer advanced platforms like the MetaTrader 4
- Offer educational and trading material
- Provide good customer support
Most importantly, you should choose a broker that supports your needs, is up to date with the latest market trends and is willing to constantly enhance their services.
Can you make money trading forex?
Forex investments are a good way to generate some online revenue. However, success is not guaranteed. Leverage and volatility, skills, a solid strategy, deep study and patience are some factors that can help in placing a good trade. Don’t forget to place stop-loss orders and work with a reliable forex brokerage. To some investors, it can be an easy road to some online revenue. To some others and to the average trader, it might be full of obstacles. In any case, even if someone manages to generate some revenue, this is not a quick process but rather a longer-term procedure. So, sit back, practise, sharpen your skills and study.
This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. FXCess is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication