The strong growth of the forex market has created a huge community of traders – scalpers, day traders, algorithm devotees and those who pin their trades around specific events. And yet there is still scope for new online retail forex traders – people just like you – to get involved.
Read on as we outline the four chief reasons why you should consider the opportunities that forex trading provides. Or skip to a specific section with these links:
- Accessibility: Forex trading basics
- Liquidity: FX is the world’s biggest market
- Flexibility: 24-hour forex
- Opportunity: Access a huge range of currency pairs
Accessibility: Forex trading basics
At first glance, the forex markets can seem bewildering – but by learning a few key concepts, you can quickly get to grips with how FX trading works. We’ve covered them briefly below, or for a full description head over to our what is forex page.
Currency pairs
When you trade forex, you’re speculating on the exchange rate of a currency pair, such as EUR/USD.
We’ve all encountered FX pairs before. When you exchange a currency – say, to go abroad – you’re buying one currency by selling another. In the case of EUR/USD, you’re buying euros by selling US dollars.
The exchange rate of EUR/USD tells you how many dollars you need to buy one euro. If USD weakens against EUR, the price of the pair will rise, as it now takes more dollars to buy a euro. If the euro weakens against the dollar, on the other hand, EUR/USD will fall.
In FX trading, you’re speculating on these movements to earn a profit.
Buy and sell prices
Your forex trading provider will offer two prices for each currency pair you can trade: the buy price and the sell price. You trade at the buy to open a long position, or at the sell if you want to go short.
This is a key benefit of FX trading – you don’t have to always go long on EUR/USD in the hope that it increases in value. If you think the euro is in for some tough times, you can short the pair and profit from the falling prices. Remember, though, that you’ll lose out on a short position if the underlying market rises.
The difference between the buy and sell prices on a pair is called the spread, and tells you how much you’ll pay to open and close the trade.
Leverage
Another major benefit of FX is leverage, which enables you to open significantly sized trades without paying for the full value of the position.
Forex is very volatile – more on that later – but the pairs don’t move in massive increments. In fact, a single point in most pairs is equal to 0.0001 of the quote currency (the second currency listed in a pair). In GBP/USD, for example, one pip is £0.0001.
Because of this, most forex trades involve buying and selling huge amounts of notional currency. Leverage means that you don’t tie up all your capital on any single trade, as you typically only need 3.33%-5% of its total value in your account to open and maintain the position.
While leverage can be a powerful benefit, it will also increase your risk. Learn more about risk management in the City Index Academy.
How do you want to trade forex?
There are two main ways to participate in the forex market: spot FX and spread betting. Both enable you to go long and short on FX pairs, and benefit from leverage, but they work in different ways.
You can try both methods with a City Index account. Follow the steps below to get started:
- Open your City Index account
- Add some funds so you can trade instantly
- Browse all our FX markets on the Web Trader platform or our mobile apps – you’ll see spot FX and spread betting markets listed
- Select a market to open your position
Or if you’d like to try out forex trading without committing any capital, you can try a City Index demo. It comes with virtual funds to enable risk-free trading on the live prices of all our FX pairs.
Liquidity: FX is the world’s biggest market
According to the Swiss-based Bank for International Settlements (BIS), forex trading volume reached $6.6 trillion per day in April 2019, up from $5.1 trillion three years earlier. That makes FX the world’s biggest asset class by a comfortable distance.
The vast number of buy and sell orders flying around the currency markets at any given time means that FX is typically highly liquid. There are a number of inherent advantages in a consistently liquid market:
Volatility means that a market’s price moves a lot, and is prized by traders as it creates lots of opportunities for profit. A stock that grows steadily each year for decades, for example, might be good for long-term investors – but it doesn’t produce many chances for short-term wins. Forex is the opposite of that.
However, the high liquidity in forex can be both an advantage and an issue. Why? Because forex markets can make wide swings, which may quickly add up to significant losses – especially when combined with leverage.
There are a number of tools on your City Index account to help you mitigate against the risk of large price swings, including stop losses, guaranteed stops, alerts and more.
It’s also worth noting that not all FX pairs are equally liquid. The BIS also found that 88% of currency trades involve the US dollar, while more recent figures provided by data supplier FXSSI reveal that EUR/USD represents 28% of all forex trades. So less-traded pairs, known as ‘minors’ and ‘exotics’, may not benefit from high liquidity.
Flexibility: 24-hour forex
There’s a key difference between forex and other markets, such as shares. While stocks are traded on exchanges – like the New York Stock Exchange – forex is bought and sold across a vast network of banks. It’s called an over-the-counter (OTC) market.
The network of banks stretches all around the globe, which means that there’s always a session open to trade forex. When banks close in London, for example, they’re open in New York. When New York closes, Sydney is open.
For FX traders, this brings one significant benefit: you can buy and sell currencies 24 hours a day. You don’t have to conform to the hours set by an exchange and can build a trading plan that suits your schedule. Forex is fully flexible.
However, 24-hour trading does have its drawbacks. Chiefly, that the markets are constantly moving, whether you are at your trading desk or not. You could wake up to find that one of your positions has earned a massive profit, or it could have reversed overnight.
Day trading forex
For this reason, day trading is popular on FX markets.
In this trading style, you always ensure that all your positions are closed before the end of the day. Not only does this help ensure that you’re never caught out by overnight price action, it also means you avoid paying overnight financing – an FX trading charge that covers the cost to maintain your leverage.
The high volatility and liquidity in forex make it a hugely attractive market for day traders, who need to earn profits from positions that only last hours or even minutes.
Opportunity: Access a huge range of currency pairs
You can make a forex pair by combining any two currencies. So, you’ll be able to access a wide range of markets with a forex account, from key pairs such as EUR/USD to obscure ones such as GBP/NOK (the pound against the Norwegian krone).
With your City Index account, for instance, you can access 84 global pairs. Combine this with the other benefits listed here – including high volatility and 24-hour trading – and you get a market that’s rife with opportunity.
To keep things ordered, FX traders tend to put pairs into one of three categories: majors, minors and exotics.
- Majors are the biggest currencies crossed with the US dollar: including EUR/USD, GBP/USD, USD/JPY and USD/CHF
- Minors are the biggest currencies crossed with each other – excluding the USD. Examples include EUR/GBP, AUD/NZD and EUR/CHF
- Exotics are pairs that involve lesser-traded currencies, such as MXN (the Mexican peso), HUF (the Hungarian forint and TRY (the Turkish lira)
Don’t worry if the choice seems overwhelming. Most FX traders start out by focusing on one of the majors, mastering the ins and outs of their chosen pair before they even consider looking at other markets. And, as we’ve seen above, most don’t trade minors or exotics at all.
For many, the best way of getting started is with an FX demo account. These enable you to buy and sell our full range of forex pairs with virtual funds, so they’re completely free and you’re risking nothing.
Open your City Index demo here.
Forex trading involves significant risk of loss and is not suitable for all traders.https://www.cityindex.co.uk/market-analysis/why-trade-forex/
2022-06-06 08:44:00Z
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