The foreign exchange market (forex, or FX for short) is the largest financial market in the world. It offers many benefits for traders - including convenient market hours, high liquidity and the ability to trade on margin. Here are eight of the biggest benefits:
All trading involves risk. Losses can exceed deposits.
The benefits of forex trading
All trading involves risk. Losses can exceed deposits.
1. Ability to go long or go short
With forex trading, it’s possible to profit whichever way the market goes. This is because it involves 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.
So in the example above, 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 would depend on the extent to which you get your prediction right, meaning it is possible to profit whichever way the market moves.
2. Forex market hours
The foreign exchange market is open 24 hours a day, five days a week – from 9pm Sunday to 10pm Friday (UK time). That’s because forex transactions are completed between parties directly, over the counter (OTC), rather than through a central exchange.
3. Currencies have high liquidity
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.
High liquidity 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.
Average global daily trading volume
Source:
Forex: Bank for International Settlements Triennial Central Bank Survey (2016)
Stocks: calculated using data from the World Bank (2017)
4. Volatility creates trading opportunities
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. Traders 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 it’s important to limit your exposure with risk-management tools.
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5. Leverage can make your money go further
IG offers two ways to trade foreign exchange pairs: spread betting and CFDs. Both options are leveraged, which can make your money go further. Leverage 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 0.5% 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 loss, so losses can exceed your initial deposit. For this reason, it’s important to consider the total value of the position before spread betting or trading CFDs.
To help you manage your risk, IG offers a range of risk-management tools including stop losses, guaranteed stops, price alerts and running balances.
6. Tax-efficient trading
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
7. Trade a wide range of currency pairs
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 90 currency pairs, including:
- Major currency pairs, e.g. GBP/USD, EUR/USD, and USD/JPY
- Minor pairs, e.g. USD/ZAR, SGB/JPY, CAD/CHF
- Emerging currency pairs, e.g. USD/CNH, EUR/RUB and AUD/CNH
- Exotic pairs, e.g. EUR/CZK, TRY/JPY, USD/MXN.
These pairs are all available to trade from the same account via a single login.
8. Multiple ways to trade
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.
We also offer a number of products designed to help you improve your forex trading:
- IG Academy is loaded with clear and engaging forex trading courses designed with the beginner in mind
- Our free demo account gives you completely risk-free access to £10,000 in virtual funds, so you can try forex trading and our technology without committing any capital
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It’s free to open an account, takes less than five minutes, and there’s no obligation to fund or trade.
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* Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
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