Why Forex? Advantages of foreign exchange explained


Trading Forex, i.e. foreign exchange market, is one of the main forms of online or offline trading. And it’s also very popular with its immense trading volumes every day. There are quite a few benefits to this market that appeal to many traders.
One of the biggest benefits of Forex trading is high liquidity. Liquidity is the ability of a certain asset to be quickly turned into cash. With foreign exchange, traders are already dealing with money, which means large sums of it can be transferred without too many obstacles.
The next advantage of Forex trading is that Forex exchanges (brokers) require smaller initial deposits than their counterparts. This is mainly because of the leverage. In this market, various service providers allow Forex traders to increase their trading volumes by whatever the leverage rate is. It means that for smaller deposit sizes, the traders can buy larger sizes of currency pairs. This, in turn, increases the possible payout as well.
Another significant benefit of Forex is the absence of commissions in most cases. The majority of service providers on a foreign exchange market get a commission by spreads - the difference between the buying and selling prices of currencies. And it’s usually lower than the actual commissions on other assets.
However, just like any other type of trading, Forex trading is a very risky and financially dangerous business. That’s why many Forex traders prefer to become more knowledgeable in the field and then get to the trading part.



The importance of Forex trading

The trading market is full of different assets that have their own distinctive sub-markets. There are stocks, commodities, derivatives, cryptocurrencies, and other assets that have their own advantages, as well as disadvantages. And then, there is foreign exchange, also known as Forex.
Forex is market exchange of different currencies and getting a payout from that process. For example, the traders in any part of the world tend to buy the EUR/USD currency pair when the exchange rate between the two currencies is lower. And when the price increases, they usually sell them, making a certain gain from this exchange.
And there are many advantages to Forex that make it one of the biggest and most active markets in the world. According to estimates, the Forex market has almost $4 trillion of the daily trading volume. This, among many things, makes foreign exchange probably the most popular type of trading in the industry.
But apart from this main characteristic of Forex, there are other advantages to it that appeal to many traders all over the world, mainly:

  • High liquidity
  • Leverage and smaller deposits
  • Smaller commissions
  • Directional trading
  • Market transparency

There are, of course, other minor advantages such as direct participation and the difficulty to manipulate or influence the market. However, the above-mentioned benefits are more popular among Forex traders and are the reason why they choose this asset over the others. So, here are these reasons to trade Forex.



One of the most important features of any asset, and not just of currencies, is its liquidity. If a certain asset is easily exchangeable for cash, that is, it can be sold or bought for money, then its liquid. And conversely, if an asset cannot be turned into cash right away or in a small amount of time, then it’s less liquid.
For example, people can more easily buy or sell a pen than a car. This means that a pen is more liquid and a car is less liquid. The reason is that there are more people willing to buy a pen than a car. Besides, pens are much more affordable than cars, thus, they’re easily bought/sold.
High liquidity is one of the biggest Forex trading advantages. But it also explains why many people lose funds in Forex. That’s because it is easier to engage in trading. So, let’s ask a simple question: will people buy currencies or stocks more frequently on a daily basis? The chances are, the answer will be currencies for a simple reason:

Why should I trade Forex

People buy currencies more often than stocks

Stocks are almost always used for trading and while it’s also one of the most popular assets on the market, the majority of people don’t engage in this form of financial exchange.
On the other hand, people travel from one country to another more frequently. This means that they need to have that country’s currency to pay for goods and services there. That’s why they buy foreign currencies with their national currency. And this type of exchange is much more frequent compared to buying stocks.
Besides, as we explained above, the liquidity of an asset is its ability to be turned into cash. And when it comes to Forex, it already deals with money - all the currency pairs are the couples of national money from different countries. This means that they already are liquid assets and can be bought/sold right away.

Leverage - one of the advantages of Forex

In most cases, starting a career as a Forex trader can require less financial resources than most other markets. Depending on a leverage rate that is being offered by a service provider (a broker or any other entity), the initial deposits can go pretty low.
 Is Forex trading worth it
Leverage is a rate at which traders’ deposits are increased by the provider. For example, if the leverage rate is 1:100, the initial deposits of, say, $100 will be turned into $10,000 of trading funds. This means that traders are able to buy larger amounts of currency pairs that they could with their smaller funds.
This also means that the payout size increases significantly. That’s why trading Forex is more appealing to traders than other assets. While the leverage can be found in other markets, it is more used in Forex, making FX trading benefits more apparent.
But leverage is associated with some risks too: while possible payouts increase in size, the possible losses expand as well. What this means is that trades with high leverage are very rewarding, as well as very risky. That’s why many traders usually treat this feature carefully.

Micro accounts also minimize deposit requirements

On top of that, many service providers offer micro and mini accounts that also help beginner traders initiate their trading careers. Mainly with micro accounts, traders are able to make significantly smaller deposits, as well as buy fewer currencies. For instance, if the standard Forex accounts require minimum deposits anywhere from $200 and more, micro accounts can go as low as $50. And the individual lots - buying the currency pairs - can revolve around $10.
When traders choose micro or mini accounts, the only main difference, and a possible drawback, is that the payouts also get smaller. Other than that, all the tools and indicators are still available for them to use and acquire more knowledge without risking too many funds.

Smaller commissions

Trading, just like any other field of economic activity, is based on getting a payout from one’s activity. To put it simply, when a trader buys currencies or a service provider allows them to do that, both of them expect some kind of a reward.
When it comes to service providers such as brokers, they mainly operate on commissions from trading. At least, that’s the case for the majority of assets like commodities, stocks, etc.
And why is Forex trading worth it? That’s because brokers don’t impose additional commission fees on their customers. Instead of commissions, there are spreads than create payouts for them.

A difference in buying and selling prices

Spread is a difference between the buying and selling prices of the currency pairs. And they’re measured in pips. For the majority of currency pairs, pips are measured as the fourth place after the decimal point. This means that if the buying price is 1.4580 and the selling price is 1.4578, the spread is 2 pips.

Advantages and disadvantages of Forex trading 

This type of measurement is mainly attributed to the stable currency pairs like EUR/USD, GBP/EUR, etc. The less stable currencies have a different method of calculation: pips here are in second place after the decimal point. For example, if the buying price of the Japanese yen is 102.98 and the selling price is 102.95, the spread, in this case, will be 3 pips.
So, these differences in prices are used as a commission fee for Forex service providers. They facilitate trade by using funds received from spreads. Of course, there are those providers who still charge commissions, but they’re not many on this market.

No restrictions on directional trading

In trading, there’s this phenomenon called directional trading which is based on traders’ views and predictions of the future price movements. This, in short, refers to the strategy of traders buying assets when their price is rising and selling them when the price is falling.
And in the Forex market, directional trading has no restrictions compared to other assets. For example, when it comes to the stock market, people don’t usually own companies’ shares. That’s why traders need to buy them in the first place and then sell them for money.
On the other hand, money is something that everyone owns. Therefore, trading in the Forex market means that you’re always buying one currency or another. This means that at any time, traders can directly buy or sell currencies without the need to borrow an additional asset. But that is also why Forex trading is a bad idea: people can more easily start trading without getting some experience first which is usually why they lose money.

Market transparency

In every type of trading, there are certain forces that influence asset prices. For example, company finances and revenues have an effect on their share prices, going up when the company is successful and going down when it struggles.
The same is true for Forex. In fact, if there’s one market with easily observable market forces, it’s probably foreign exchange. You see, currencies are issued by the governments; they have been doing this for a long time.
Forex trading experience
 This means that not only economic but also political forces actively influence currency prices. This makes observing the market forces easier in Forex than in most other assets. That’s because there are countless popular publications and news sources that constantly cover political and economic conditions.
The Forex traders usually keep up with these developments and get an idea regarding the future direction of prices. Whereas collecting the data about the individual companies and their market conditions can be quite challenging, making it difficult to predict the price movements as well.

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Advantages and disadvantages of Forex trading

As mentioned earlier, there are both advantages of foreign exchange, as well as disadvantages, that are worth considering. Liquidity, leverage and reduced deposits, smaller commissions, directional trading, and market transparency make Forex one of the popular trading markets.
However, having listed these advantages doesn’t mean that Forex is free of disadvantages. And it’s only fair to mention them here as well.
Just like any type of trading, Forex trading is also associated with financial risks. When traders make hundreds or thousands of dollars of deposits to buy currency pairs, they risk their funds.
Volatility is one of the main contributors to this risk. It’s a constant and sudden change in prices that make the pairs unstable. And this, in turn, makes prospects of losing just as high as the prospects of payout - maybe even higher. That’s why successful traders usually make careful and calculated decisions when trading Forex.

FAQ on the benefits of Forex trading

What are the advantages of investing in Forex? 

Trading Forex, just like any other asset type, has its own advantages and disadvantages. Some people prefer a foreign exchange of currencies over buying and selling stocks, commodities, or cryptocurrencies.

And when it comes to the FX trading advantages, there are certain points to take into consideration: first, the Forex market is very liquid, meaning that at any time, it’s possible to buy or sell currencies using cash because, well, the currency is itself a form of money.

Another reason why Forex might be preferable for traders is the ability to make smaller deposits. It’s especially beneficial for beginner traders who want to get into this business.

Then there are smaller commissions, easily “readable” markets, directly tradable assets, etc. But that’s not to say that risks aren’t present here. Volatility - a sudden change in price - can have a detrimental influence even on experienced traders.

Why should I trade Forex?

There are several reasons why people would want to engage in trading, be it Forex, commodities, or any other market. When it comes to Forex, people usually find it easy to enter this market even if they’re beginners.

One of the main reasons behind this simplicity is the ability to make smaller deposits. Mini and Micro accounts offered by service providers allow traders to deposit, say, $50 or $100 dollars, and use a complete toolset of charts, spread, and leverage. 

Apart from that, there is leverage that can increase trading volumes. For example, if a trader deposits $100 on their account, the leverage rate of 1:50 can increase that deposit to $5,000. This way, traders can buy $5,000 worth of currencies and get bigger payouts as a result.

Which is easier Forex or stocks?

There’s not a universal answer as to which one is simpler: trading Forex or trading stocks. Some people prefer the volatility of stocks, which leads to higher payouts but also threatens them with bigger losses. It’s a high-risk, high-return business.

But that doesn’t mean Forex isn’t. It’s also quite volatile, but not so much as stocks. People prefer some other FX advantages, and one of them is higher stability. That’s because the governments are in control of the monetary policy and they usually want to make their currencies as stable as possible.

If we take a look at the ease of getting into trading, maybe Forex might be a better option for beginners. The reason for that is the smaller deposit requirements. Traders can choose micro or mini accounts, deposit fewer funds, and minimize the risks.

Why is an education in Forex trading important?

Getting an education is important in not just Forex, but in every field of trading. At least that’s how many traders have become successful in it. Of course, there are some who were lucky enough to get bigger payouts right away, but more often than not, people aren’t usually that lucky and the benefits of FX come to those who are more prepared.

Not to be too dependent on chance, traders prefer to gain some knowledge in the field, get to know the main indicators and drivers of the market, and then proceed to trade. 

Another strategy they usually follow is to constantly check the global politics and economy. What happens in the world can greatly influence the currency prices and thus, the payout prospects. That’s why having them in check allows traders to make more or less accurate predictions.

Why is Forex trading a bad idea?

There’s no such thing as one particular type of trading being good or bad. Rather, it’s about how people use them and manage risks associated with them. 

So, here’s why Forex trading is a bad idea in some cases: some of its risks and dangers can be no less pressing than that of other markets. There are high volatility rates to account for, because more often than not when traders buy too many currency pairs with no prior calculations, the risk of them losing funds becomes higher.

Another downside of Forex is that when service providers offer leverage, it not only increases the prospective payouts; it also expands the possible losses. And for that reason, people tend to make more calculated decisions about how many currency pairs to buy and sell.

What are the advantages and disadvantages of foreign exchange market virtual trading?

One of the great advantages of trading Forex  is that you can open a fully-virtual trading position and exchange just about any currency you want. This is possible via demo accounts, which can be found with pretty much all brokerage firms. 

Yet another one of the Forex pros of demo trading is that you can take advantage of it regardless of whether you're a beginner or an experienced trader. As a beginner, you can kickstart your trading career by getting to know the ins and outs of this exchange market, whereas an experienced trader would be able to test their new strategies/financial instruments without actually risking their funds. 

With that being said, however,  benefits of Forex demo trading are also accompanied by some disadvantages. For instance, trading virtually without having any financial capital at stake can prove ineffective for learning more about this market for some people. They don't have enough emotional connection to the positions they're managing, which is why they tend to choose live accounts, which have more Forex trading benefits than demo accounts for them.

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