The foreign exchange (or forex market) is one of the largest entities of its type anywhere in the world, with a cumulative value of $2.409 quadrillion at the end of 2020.
Because of this, the market is highly attractive to both newcomers and experienced investors, although many often fail to recognise the challenges posed by volatility and opening highly leveraged positions.
But what exactly is FX market trading, and what are the primary advantages of investing in international currencies?
What is Forex Market Trading?
The forex market is the medium of exchange for international currencies, which are traded in pairs and in derivative assets when individuals can speculate on price movements rather than assuming ownership of the underlying financial instruments.
We’ve already touched on the total size of this leveraged marketplace, while the global daily trading forex volumes peaked at around $6.6 trillion as recently as 2019 (up from $5.1 trillion in 2016).
Open to traders 24 hours a day and six days a week, the market comprises 170 different currencies and a total of seven major pairs. These pairs are the most liquid on the market and pit the USD against the seven other ‘major’ currencies on the foreign exchange.
Incredibly, the greenback is on one side of 88% of all currency trades, while the seven major pairings make up approximately 68% of the market’s total trading volume.
What are the Benefits of Trading Currency?
Ok, but what are the primary benefits of trading international currencies? Here are some of the most important to bear in mind:
- Use Volatility to Your Advantage: As we’ve already touched on, the fx market is quite volatile and currency pairs can be traded speculatively as derivatives. This can create the perfect storm for risk-hungry day traders and scalpers, who can leverage price fluctuations to their advantage and achieve a number of incremental returns during the typical trading day. This also explains why currency trading offers a superb balance between risk-reward from an investor perspective.
- Utilise Leverage to Optimise Returns: Leverage is another key forex concept, and one that relates to the process of borrowing capital to increase the size of your trades. You can access leverage of up to 100:1 through licensed and reputable brokers, allowing you to control disproportionately large positions with your deposit amount. Of course, there’s the risk of increased loss here (which is why you should be careful about the amount of leverage that you utilise), but it can also optimise your returns over time.
- Benefit from Increased Liquidity: The term ‘liquidity’ refers to the ease with which assets can be bought and sold on a particular market, with currencies amongst the most liquid assets available. This is particularly true in the case of major currency pairs such as the EUR/USD, which accounts for more than 24% of global trading volumes and can be bought and sold with relative ease in real-time.
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