While the first thing most traders might choose to trade is stocks, there are actually a lot of different financial instruments to pick from. One such instrument is forex – a portmanteau of foreign exchange. In fact, it can be a lucrative opportunity for those who understand how the market works. As the foreign exchange market is one of the most liquid and largest markets in the world, traders can find many opportunities there, if they know where to look.
Essentially, forex trading is very similar to currency exchange, which is where a trader will buy a currency and sell another in the forex market. Most of these exchanges take place between institutional traders – meaning that they tend to work for fund managers, large conglomerates or banks. In fact, these trades do not necessarily have to have physical possessions – traders can just speculate or hedge against future exchange rate fluctuations. Currencies are mainly traded in pairs, with the one presented first being the base currency, and the quote currency second.
Despite forex trading being slightly complicated when compared to stock trading, there are a few reasons why traders go for this option. Here, we discuss a few of the reasons why people decide to jump into forex trading in Australia.
Flexible working hours
As the forex market is open 24 hours a day 5 days a week, this means that a forex trader can trade whenever they want. This is different to stock trading, where there are set opening and closing times for the stock exchange. Additionally, because forex is a global market, traders can also take advantage of different session’s trading hours too. While retail traders tend to be barred from trading forex over the weekends, this is not true for institutional traders. This means there can be variations in the price of trades over the weekend. Therefore, traders need to be aware of weekend forex trading hours if they do not want to expose themselves to further risk. This risk can be mitigated by setting stop-loss and limit orders.
Leverage
This can be both an advantage and disadvantage to novice traders. Simply put, leverage is a way to increase your trading position by paying only a fraction of its full value upfront. This allows traders who may not have much in the way of funds to expand their trading opportunities. On the flip side though, leverage can also magnify any losses occurred, since losses reflect the total value of the trading position – not the amount a trader has paid upfront. Leverage tends to be presented in a ratio format, with 1:30 and 1:50 being the most common. For instance, if you take advantage of 1:50 leverage, this means you could trade up to $50 for every $1 in your account.
Liquidity
Forex boasts one of the most liquid markets in the world. This indicates that there are plenty of buyers and sellers that will be trading or looking to make a trade at any moment. Due to its high liquidity, it means that trades and transactions can be done quickly and efficiently, so costs are often low. It also helps get rid of price manipulation and anomalies. Unlike in equity markets, where traders need to worry about high volatility in their opening and closing hours, or stagnant activity in the afternoon, the forex market tends to have similar price patterns throughout its sessions.
Good for beginners
Another large advantage of forex trading is how easy it is to get started, even if you are a complete novice. This is what makes it so popular with hobbyists and retail traders. In fact, most brokers offer free demo accounts, which allow traders to practice their trading strategies without any risk. It is essentially a ‘try before you buy’ test run. These free demo accounts work by simulating live trading scenarios so that traders get a chance to see how the trading platform works, what kind of market movements there are, and how to develop strategies that are tailored to their needs and goals. This is all without any financial commitment – so be sure to take full advantage of these tools before diving into forex trading for real!
Accessible and low cost
Compared to other financial instruments, forex trading tends to have low costs – regarding both commissions and brokerages. In fact, there are technically no commissions – this is a result of brokers mainly taking advantage of spreads between their currency pairs. Therefore, traders do not need to worry about separate brokerage charges, which gets rid of any overhead costs. With securities and equity trading, brokerages vary widely, so these fees need to be taken into account by traders.
No central exchange
Forex trading is usually done over the counter (OTC). This means that there is no central exchange or regulator. As everything is decentralised and relatively deregulated, it means the market can better avoid any sudden surprises that might happen. This is in contrast with the stock market, where for instance, a company can suddenly declare huge losses, leading to huge changes in price. Even more important, having no central exchange helps to keep costs low. This is because orders are placed directly with the broker individually. The forex market also allows traders to take short positions, which is often banned in other markets due to security issues.
Suits a variety of trading styles
As mentioned previously, the forex market runs 24 hours a day. This allows people to make trades at their own convenience. As such, this aspect of forex trading is fantastic for short-term traders, whose main aim to is to enter and exit positions over short durations (generally a few minutes to a few hours). For example, when it is daytime in Australia, it is nighttime for those on the East Coast of the US. As such, those based in the US can trade AUD during their business hours. Additionally, forex traders can choose to take long-term positions if they so wish, which can last from days to several weeks. Ultimately, forex trading tends to be flexible and accommodating in this manner.
