There are different options you can choose from when trading. You can trade stocks; you can trade commodities; you can trade bonds. And yet, the forex market dwarfs all others.
What about forex trading makes it attractive to traders of all stripes? In this lesson, you’ll learn about the many advantages that forex trading has to offer.
Lesson Highlights
- The forex market’s decentralized nature makes it less expensive to trade in than other financial markets.
- The forex market is the world’s largest and most liquid market.
- When trading forex, you can trade in the spot, forward, or futures market.
- Trading forex is generally less expensive than trading other financial instruments.
The Forex Market Is Decentralized
As you’ve learned in the earlier lessons, forex trading is done through an over-the-counter (OTC) market. There is no centralized exchange or physical location where forex trades happen. Instead, banks, brokers, and other financial institutions facilitate these trades electronically.
This means you don’t have to go to a particular location when you want to trade; you can do it on your computer or even your phone instead!
The forex market’s decentralized nature helps keep the cost of trading low because of several reasons, such as:
- No central exchange means reduced transaction costs.
- A decentralized market encourages competition between brokers. This usually leads to brokers offering lower prices to attract clients.
The Forex Market Is Open 24/5
Another advantage of the forex market’s decentralization is that it is open 24 hours a day, five days a week.
Because it’s available almost all the time, you have the freedom to choose when to trade. Regardless of where you live, you can fire up your computer or your phone and enter a trade any time of the day.
For instance, if you live in South Africa and open a trade at 08:00 AM local time, you would likely be trading during the overlap of the European and London trading sessions.
However, if you want to trade at 09:00 PM local time, you will be on time for the Asian session’s opening, specifically the Tokyo trading session.
The Forex Market Is Very Liquid
The forex market is the world’s largest in terms of volume. The sheer size of its trading volume also makes it the world’s most liquid market.
In fact, it’s so liquid you can enter and exit trades in under a few minutes!
The market’s high level of liquidity lets you choose a trading strategy that works best for you.
You can scalp trade, which means making quick trade entries and exits several times throughout the day.
You can day trade, which refers to holding your trade position just through the day.
You can also swing trade, a strategy that focuses more on long-term price movements.
Forex Trading Offers Many Options
Aside from letting you choose from various trading strategies, the forex market also offers a wide range of options regarding what you can trade. Although, of course, these options are all currencies.
You can trade in the spot forex market, which is what people typically refer to when they say forex. In this market, you buy and sell currencies at their current exchange rate when you trade.
There are also the forward and futures markets. These are similar markets with a few key differences. Both involve you and another party agreeing on a contract to exchange currencies at a given price on a future date.
Forward markets are more customizable, less regulated (if at all), and less liquid. On the other hand, futures markets have less customizability and more oversight and security.
Forex Trading Is Easily Accessible
Compared to other markets (e.g., stocks, bonds, equities), the forex market has a lower entry barrier in terms of transaction costs and additional fees.
Being decentralized, you’ll have fewer intermediaries to go through when trading forex. This significantly lowers the cost of trading. Though you’ll likely still go through a broker to serve as a third party when trading, these institutions compete with one another and often offer competitive prices.
Brokers seldom impose commissions when trading. Instead, they generate revenues through spreads when you trade. When trading other financial instruments, you’ll often need to pay separate commissions on top of the spreads.
Now that you’ve become familiar with some of the advantages forex trading offers, you can begin comparing it to other financial instruments. In the next lesson, you’ll see the differences between trading stocks and forex.
