The financial market has brought incredible success to many people around the world. Investors like Warren Buffett and Steve Cohen have made fortunes in the stock market. At the same time, an ever-increasing range of products has emerged that investors can use. Some of these include unit trusts, bonds, exchange traded funds, and more. While it is possible to make money in all these avenues, this article will present the case for why the forex market should be considered the best.
What is Forex?
Forex is the short form of foreign exchange. It is an industry where people trade derivatives created from the world’s currencies. As an example. If you hold $1000 and decide to exchange them to Japanese yen, which has an exchange rate of 110, you will have Y110,0000. If you then decide to change the yen to dollars but the exchange rate has dropped to 100, you will have $1100. In a nutshell, this is what forex trading is. Every day, people and institutions use the forex market to identify trading and profit opportunities.
The first advantage that forex has over, for example, stocks and bonds is its liquidity. In simple terms, the market has many participants, which means you can buy a currency pair and exit the trade within a few minutes. This is possible because every day, traders exchange currencies worth more than $5.3 trillion. When there is no liquidity, however, it becomes increasingly difficult for you to exit a trade.
In the stock market, it is only possible to trade when the exchanges are open. This happens for a short period every day. The same is true in the bond market. However, in forex, the market is usually open for 24 hours every day Monday to Friday. The reason for this is that in currencies, trading does not happen through exchanges. Instead, it happens through financial centers. These centers like Hong Kong, Tokyo, New York, and London have different time zones. Therefore, when New York is open, Tokyo is closed and vice versa.
Difficult to Manipulate
The world of stock markets is sometimes open to manipulation. Every day, large banks like Goldman Sachs and Deutsche Bank release their analyst calls. When they do, the stock tends to rise and fall. In addition, insiders tend to know what a company is doing, which means they can buy or sell depending on the performance. In currency trading, investors have an equal footing because it is difficult to manipulate. This is because there is no privileged information in the industry.
Because forex trading is a global industry, anyone around the world can trade. In fact, even people from the poorest countries are today participating in the forex trading industry.
Investing in individual stocks requires a lot of knowledge. For example, you need to understand what the company does, who the managers are, and their strategy. You also need to understand concepts like valuations. Forex, on the other hand, is different. If you have a good understanding of fundamental and technical analysis techniques, you will be fine. In fundamental analysis, you just need to understand how to interpret the various economic data while in technical analysis, you just need to know how to interpret the various indicators.
Margin and Leverage
In addition, most forex brokers provide their traders with leverage. This is the concept of using borrowed money to trade. By using leverage, you can easily maximize your returns. Many brokers provide leverage of up to 30:1 or more, depending on their jurisdiction. You just need to be careful when using leverage to manage your risk effectively, which leads us to the last point below.
Risk Management Tools
Finally, in forex, there are several risk management tools that are provided by brokers. For example, brokers provide the stop loss tool, which is used to limit the amount of losses one can make. Others have negative balance protection tools. In addition, some brokers provide proprietary risk management tools.
Therefore, while there are merits for trading in other assets like stocks and bonds, forex trading has more advantages, which we’ve discussed above. However, to succeed in it, you need to create a strategy and test it using a demo account. Doing this will help you avoid making the most common mistakes that many forex traders make.