Foreign exchange (forex, or FX for short) is the marketplace for trading all the worlds currencies and is the largest financial market in the world. There are many benefits of trading forex, which include convenient market hours, high liquidity and the ability to trade on margin. Learn more about nine of the biggest advantages of forex trading below.
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When traders choose which market to trade, they are looking for optimal trading conditions and the best chance of taking a profit. There are many reasons why millions of traders across the world think that the forex market fits these criteria, but we are going to focus on the top nine benefits of forex trading:
While you can go short on other markets by using derivative products, such as CFDs and spread bets, short selling is an inherent part of trading forex. This is because you are always selling one currency (the quote currency) to buy another (the base currency). The price of a forex pair is how much one unit of the base currency is worth in the quote currency.
For example, in the forex pair GBP/EUR, GBP is the base currency and EUR is the quote currency. If GBP/EUR is trading at 1.12156, then one pound is worth 1.12156 euros. If you think that the pound is going to increase against the euro, you would buy the pair (going long). If you think that the pound will decrease in value against the euro, you would sell the pair (going short). Your profit or loss will depend on the extent to which you get your prediction right, meaning it is possible to profit whichever way the market moves.
The foreign exchange market is open 24 hours a day, five days a week forex can be traded from 9pm Sunday to 10pm Friday (UK time). These long hours are because forex transactions are completed between parties directly, over the counter (OTC), rather than through a central exchange. And because forex is a truly global market, you can always take advantage of different active sessions forex trading hours.
It is important to remember that the forex markets opening hours will vary in March, April, October and November, as countries shift to daylight savings on different days.
The forex market closes on Friday night at 10pm (UK time) and does not open again until 9pm (UK time) on Sunday evening. However, because the market is only closed to retail traders (not central banks and related organisations), forex trading actually does take place over the weekend. This means that there can be a difference in price between Friday close and Sunday open known as a gap.
Traders need to be highly aware of the weekend forex trading hours and alter their positions accordingly. If you do not want to expose your position to the risk of gapping, you may want to consider closing your position on Friday evening or placing stops and limits to manage this risk.
The FX market is the most liquid market in the world, meaning there are a large number of buyers and sellers looking to make a trade at any given time. Each day, over $5 trillion dollars of currency is converted by individuals, companies and banks and the vast majority of this activity is intended to generate a profit.
The high liquidity in forex means that transactions can be completed quickly and easily, so the transaction costs or spreads are often very low. This creates opportunities for traders to speculate on price movements of just a few pips.
Forex: Bank for International Settlements Triennial Central Bank Survey (2016)
Stocks: calculated using data from the World Bank (2017)
The high volume of currency trades each day translates to billions of dollars every minute, which makes the price movements of some currencies extremely volatile. You can potentially reap large profits by speculating on price movements in either direction. However, volatility is a double-edged sword the market can quickly turn against you, so its important to limit your exposure with risk-management tools.
IG offers two ways to trade foreign exchange pairs:spread bettingandCFDs. Both options are leveraged, which can make your money go further. Leverage in forex enables you to open a position on the currency market by paying just a small proportion of the full value of the position up front. For example, opening a spread bet on EUR/GBP might require a deposit worth just 3.33% of the total value of the position. This initial deposit is referred to as margin.
The profit or loss you make will reflect the full value of the position at the point it is closed, so trading on margin offers an opportunity to make large profits from a relatively small investment. However, it can also amplify any losses, meaning losses could exceed your initial deposit. For this reason, its important to consider the total value of the leveraged forex position before spread betting or trading CFDs.
To help you manage your risk, IG offers a range ofrisk-management toolsincluding stop losses, guaranteed stops, price alerts and running balances.
Both spread betting and trading CFDs on forex can offer significant tax benefits:
Spread betting is completely tax free.* There is no capital gains tax (CGT), as you never own the underlying asset
CFDs are not exempt from CGT. However, you can offset your losses against your profits for your CGT liability, which makes CFDs useful for hedging
Forex trading gives you the opportunity to trade a wide variety of currency pairs, speculating on global events and the relative strength of major and minor economies.
With IG, for example, you can choose from over 80 currency pairs, including:
These pairs are all available to trade from the same account via a single login.
Hedging is a technique that can be used to reduce the risk of unwanted moves in the forex market, by opening multiple strategic positions. Although volatility is part of what makes forex so exciting, hedging can be a good way of mitigating loss or limiting it to a known amount.
There are a variety of strategies you can use to hedge forex, but one of the most common is hedging with multiple currency pairs. By choosing forex pairs that are positively correlated, such as GBP/USD and EUR/USD, but taking positions in opposite directions, you can limit your downside risk. For example, a loss on a short EUR/USD position could be mitigated by a long position on GBP/USD.
Alternatively, you could use forex to hedge against loss in other markets, such as commodities. For example, because the USD/CAD generally has an inverse relationship with crude oil, it is commonly used as a hedge against falling oil prices.
IG offers a range of trading platforms on web, mobile and tablet, as well as specialist platforms for those looking to take their trading to the next level. You can get access to a range of features designed to help improve your trading, including risk management tools like stops and limits as well as interactive charts and integrated news feeds.
We also offer a number of products designed to help you improve your forex trading:IG Academyis loaded with clear and engaging forex trading courses designed with the beginner in mind
Our freedemo accountgives you completely risk-free access to 10,000 in virtual funds, so you can try forex trading and our technology without committing any capital
Your decision about whether to trade forex or stocks on leverage should be based on which asset you are interested in trading currencies or shares. However, there are a few reasons why some traders prefer to trade forex than stocks:
: the stock market is limited to an exchanges opening hours, whereas the forex market is open 24-hours a day. However, it is worth noting that certain stock indices are available forweekend trading
: the forex market sees an average daily turnover of $5 trillion, whereas the stock market sees comparatively fewer traders per day
: the stock market tends to have more stable prices that change over a longer period of time. Although this is a great thing for some trading styles, the volatility of the forex market can create an exciting range of opportunities for shorter-term traders
When you are deciding whether forex or the stock market is better for you, you should consider your attitude to risk and your financial goals.
Although there are multiple benefits of forex trading, the volatility of the market and the leveraged trading instruments do come with increased risk. However, there are a variety of ways that you can manage your currency risk, such as attaching stops and limits to your position, setting price alerts and using a trading style that matches your attitude to risk.
There are three ways to trade forex: spread betting, CFD trading and trading via a forex broker. All three are speculative products, which enable you to trade on the future direction of a forex pairs price, without having to take ownership or delivery of the physical currency.
What is the easiest forex pair to trade for beginners?
The easiest forex pair to trade will vary from trader to trader, depending on their interests and attitude to risk. A good place for beginners to start would be the major forex pairs that have a larger trading volume, which makes them far more liquid and potentially less volatile.
The most traded currency pairs are the major crosses, including EUR/USD, USD/JPY, GBP/USD and USD/CHF. For those just starting to trade the forex market, it is important to understand that the majority of forex trading is concentrated across these combinations, which can make them easier to trade as they have higher liquidity.
Find out more about forex trading and test yourself with IG Academys range of online courses.
Trade over 80 FX pairs, with spreads starting from 0.6pts on EUR/USD
Learn the mechanics of a forex trade: including pairs, pips and leverage
See how our technology can help you trade efficiently
* Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.75% of retail investor accounts lose money when trading spread bets and CFDs with this provider.You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.
The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results.
CFD, share dealing and stocks and shares ISA accounts provided by IG Markets Ltd, spread betting provided by IG Index Ltd. IG is a trading name of IG Markets Ltd (a company registered in England and Wales under number 04008957) and IG Index Ltd (a company registered in England and Wales under number 01190902). Registered address at Cannon Bridge House, 25 Dowgate Hill, London EC4R 2YA. Both IG Markets Ltd (Register number 195355) and IG Index Ltd (Register number 114059) are authorised and regulated by the Financial Conduct Authority.
The information on this site is not directed at residents of the United States, Belgium or any particular country outside the UK and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.75% of retail investor accounts lose money when trading spread bets and CFDs with this provider.You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.