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Besides the secure income from the main job, individuals tend to improve their finances by additional investments. Several people choose to own a business whilst others allocate some portion of their budgets to speculate on such financial assets as securities or commodities. Among those instruments, foreign currencies are more lucrative to investors. So the forex market has become more vivid than ever before. However, is forex a good investment? Here are the top reasons to justify why forex is worth investing in 2021.
Top 10 Reasons Why Forex is the Best Market to Trade in 2021
The World’s Largest Financial Market
Basel, Switzerland – January 2021 – The Bank for International Settlements (BIS) released a comprehensive report of foreign exchange and over-the-counter (OTC) derivatives markets based on the recent Triennial Survey that took place in 53 jurisdictions. It indicated that the daily turnover of forex is $6.6 trillion, which turns forex into the biggest money market in the world. This becomes a big advantage for traders to invest in.
Also, its portfolio diversification allows you to trade different types of currency pairs, sequentially called majors, minors (or crosses), and exotics.
In normal market conditions, the sheer trading volume of majors (i.e. EUR/USD, USD/JPY or USD/CHF) provides high liquidity and low volatility, which means majors are easily traded in a significant quantity without much change in value. Therefore even in the worst case, forex traders, especially beginners, are less likely to suffer from unfavorable movements of the market. Also, transaction costs, known as bid-ask spreads, paid to forex brokers would be narrowed in the case of trading majors. Those benefits are a result of the strong economy and political stability of countries holding major currencies.
Meanwhile, crosses (i.e. EUR/CHF or GBP/JPY) and exotics (i.e. USD/MXN or EUR/TRY) are less liquid. In some points of time, it is more difficult for you to trade those currency pairs in considerable volume without moving the price too much to find the counterparty that is willing to accept your order. Even in times of crisis or when major news (i.e. the interest rate release or trade wars) is announced, major currency pairs can undergo high volatility, which therefore leads to wider spreads. To experienced investors who base rational decisions on fundamental and technical analysis, volatility is an opportunity to gain higher profits.
Therefore, trading forex can give traders a higher return on investment (ROI) but they should also pay attention to unexpected risks when learning about forex.
Another advantage of forex trading is its ease of access. Rather than conducting transactions in physical locations, investors will trade foreign currencies in over-the-counter (OTC) systems decentralized in the world’s financial centers such as London, New York or Tokyo. To directly enter the forex market, speculators have to open an account with forex brokers and then possibly start trading on customized trading platforms – mostly MetaTrader 4 and 5. Provided in many versions for websites, desktop and mobile phones, those tools allow clients to trade forex whenever and wherever possible, as long as their devices are well-connected with the Internet.
24-Hour Forex Trading
Coupled with its online presence, the forex market enables investors to open and close any position 24 hours a day. That is, the forex 3-session system allows FX transactions to take place in three main trading sessions including North American session (New York), European session (London) and Asian sessions (Tokyo and Sydney). The official time of forex trading is shown as follows:
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|Sydney||10 PM on Sunday to 7 AM GMT+0|
|Tokyo||12 AM to 9 AM GMT+0|
|London||8 AM to 5 PM GMT+0|
|New York||1 PM to 10 PM GMT+0 on the next Friday|
There is always a trading session opening and there are overlaps between two sessions. This explains why investors can trade currencies internationally during the day. Concurrently, this is also a competitive advantage of forex over other financial markets that open only in certain hours. To part-time traders, their working hours and family time will be less impacted by forex trading, whereas full-time investors may choose a suitable time to trade currency pairs without fear of their trading activities being restricted in certain times.
No Ownership of Financial Assets
The basic principle of trading is selling what you own to buy what you need and vice versa. This also applies to conventional foreign exchange activities. For example, if a Japan-based company wants to import materials from a US client, it has to first swap Japanese yen with the US dollar. What if the company doesn’t have any cash in hand for conversion? It then has to borrow the yen from Japanese banks that require an interest rate; otherwise, it has to cancel the order. This is also how forex trading works on an OTC market. Accordingly, retail investors will enter into contracts for difference (CFDs) which “lend” them currencies to buy or sell others.
One of the key factors behind investments in forex is leverage. This common financial term refers to enabling speculators to borrow money for trading but requiring no interest rates. The leverage ratio is displayed in a trading platform as follows:
Once opening a new account, albeit real or demo, investors should choose the leverage rate that suits their deposit, trading strategy and many more. Assuming a trader initially invests $100 in his or her trading account and wants to magnify it up to 100 times, the trading capital now reaches $10,000. Accordingly, he or she can open one mini lot (0.1 lot) or 10 micro lots as the maximum.
Compared to other financial markets, forex offers a higher leverage rate, commonly 1:200. Some forex brokers even support their clients to increase deposits up to 500 or 1000 times. Therefore, leveraging allows traders to start trading forex with low capital. This differs from other financial markets that require large investments to conduct transactions.
After registration for a trading account, traders don’t need to jump into real trading immediately if they’re not accustomed to the market. Instead, they can engage in paper trading which takes place in simulated market conditions. More particularly, they are given virtual money and freely choose an appropriate leverage ratio. This helps new investors avoid monetary risks and test their trading strategies before doing real trades.
The Ideal Market to Learn About Trading
If you want to invest in financial instruments but have little knowledge of this field, forex will be a good start. As already mentioned, a trader can open a margin account with a small investment, which would reduce the unexpected risk of losing money when the market moves against the trader.
Further, in case of their ignorance about the forex market, investors may open demo accounts or trade forex with a very small account size first. Normally, most brokers offer the smallest marketable account size of 0.01 lot (one micro lot equals 1,000 units of the base currency), but some still allow their customers to trade one nano lot (100 units) in case investors want to test trading strategies on live market conditions without fear of losing too much. Moreover, forex is one of the financial markets that have the smallest spreads which are measured in fractions of dollars. All of those things turn forex the ideal market to learn about trading.
To ensure the transparency and credibility of forex brokers, their operations are under the regulation of local and international organizations. This requires brokerage companies to strictly comply with anti-money laundering laws and render the forex market safe enough to trade-in. However, it doesn’t mean all forex brokers are worth trusting because there are many scam companies out there. Hence choosing a legitimate broker is of the top priority.
Support from Different Sources
Investors will be completely supported even when they are new in the forex market. Particularly, all activities from registering and funding an account to withdrawing profits are quickly processed by account managers. In addition, beginners are well-equipped with comprehensive knowledge of general terminologies, price action patterns and so forth by educational materials available on a broker’s website, frequent webinars with personal experts and precious experience from fellow traders shared on forums. So when struggling with forex trading-related issues, speculators may easily find support from different sources.
Bonuses and Promotions
Besides the leverage strategy that allows traders to transact more than what they have, brokers offer attractive bonuses and promotion programs to augment their clients’ trading capital. For instance, FiNMAXFX gives a 50% bonus (the maximum of 500 dollars or euros) to customers for their first-time deposit. If you invest $500 in your account, your account balance will be $750 (= $500 + $500 x 50%).
Is Forex Trading a Good Idea?
Despite the potential benefits and profitability of forex trading, the answer still depends on different factors, most importantly your preparation for the market. It should be noticed that risk always goes favorably with rewards. The forex market can either be highly profitable or burn your account after one night.
As forex is primarily affected by supply and demand – in other words, the market trend which is occasionally hard to predict, failure to read price actions and make rational analysis will pose traders to risk of losing more money than expected. The investment in forex is a good idea only when traders know well about how the market operates, how to manage risk effectively and which goals they want to achieve.
Apart from that, such psychological factors as passions or fear of losing also have a profound impact on the outcome of forex trading, so they should be considered as well. All those things apply to other financial markets, but not only forex. Therefore, if a person is unready for the venture, trading forex is discouraged.
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