Benefits of Trading Forex
- Anyone can trade 24/7.
- There are no broker’s commissions.
- The market is more difficult to manipulate or influence by any single organization or individual.
- The smaller number of currency pairs are easier to monitor than the thousands of stocks in the stock market.
- High leverage of up to 400:1.
There is no central clearing or trading location for Forex Trading, it happens continuously in different parts of the world, as the sun sets in Asia and its banks close, trading begins in the U.S. This follow-the-sun operation of forex trading allows traders to engage anytime of the day.
Brokers do not charge traders a commission on their transactions. They make money by what is called the “spread” which is the difference between the bid and ask price for a currency pair. The highly traded a currency pair is, the smaller the spread, since a few “pips” – difference between the fourth decimal place – becomes substantial when volume is huge.
Daily forex trading volumes are measured in trillions of U.S. Dollars. The sheer amount of currency changing hands every day make it very difficult, if not impossible, to influence an exchange rate between two currencies. Even Central Banks, who intervene in the market to stabilize the value of their currency with billions of funds at their disposal will not be able to hold their position in the long run if the supply and demand for the currency is not in their favor.
Majority of the foreign exchange trading happen between pairs of only the seven most-traded currencies. The foreign exchange trader usually focus only on these major currencies and some even trade on just the top four: the U.S. Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), and the British Pound (GBP). Limiting their transactions to only a few currencies allow traders to monitor the factors that affect the value of these currencies relative to one another and increase their chance of making a profit.
Since the standard “lot”, the unit of transaction, is 100,000 USD, brokers allow high leverage for the traders to allow them to play in the game. For example, if the leverage given in 200:1, with a 500 USD initial capital, a trader can play with 200 times its value (or 500 x 200 = 100,000), or a standard lot. This magnifies the amount that a trader can gain or lose. To limit a loss, traders have the option to stop their trading once their loss equals that of their initial capital.
Retail forex trading has been increasing as more and more individuals are lured in its potential for profit. However, the high-income potential of forex trading comes with high risks as well, and individual retailers have a huge information disadvantage over full-time traders, central banks and financial institutions. It is highly recommended that people who plan to venture into forex trading understand the market and its characteristics fully before putting up real money into the play.
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