1.2 Why Trade Forex?

Additional Reading About Why Trade Forex

So why trade Forex?  Ask three different people and you will get more than three different answers. Right off the bat, making money is the most frequently cited reason for why Forex. And this is a perfectly legitimate motivation: we all live in a world where money, even if it can’t buy everything, can certainly make life a lot more enjoyable.

There are some people who trade in the Forex market because they see it as a form of gambling and betting on the winning number. It really can be a lot of fun, especially if you win. And there are others who trade Forex just for the personal satisfaction of making a trading system work for them and coming out with the results they aimed for. We are always satisfied when we make the right choice and come home the winner.

So Why Forex?

Traders experience a lot of excitement when placing a trade of any kind. Forex trading however has many features other investment vehicles don’t have. Included in these are the very convenient trading hours. Since most Forex trades are placed online and many Forex brokers are located across the globe, trading hours are longer than those of NASDAQ or the New York Stock Exchange. This presents opportunities for investors to do their trading all though the nighttime hours.

Another major feature of Forex trading is its diversification. Just as every competent investor needs to diversify his investments by asset classes and sectors, so too he needs exposure to assets in multiple currencies that’s why Forex trading has become so popular. 

Instructor's Notes

The lesson’s video outlines some reasons to trade Forex:

• Diversification
• Some currencies are positively correlated with certain commodities and stock markets, and so can be used to hedge positions, or as a proxy where the Forex instrument is cheaper to trade
• High Risk-Adjusted Returns
• Suitable for both short and long-term traders
• Leverage is freely available
• True short-selling does not exist in Forex, so no trading restrictions ever come into operation, unlike in stock markets

There are some equally good additional reasons worth considering:

• It is easy to open a Forex trading account, even with deposits as small as a few hundred U.S. dollars
• There are a large number of Forex brokers to choose from
• Trading commissions are relatively small
• Forex is widely believed to be relatively easy to analyze technically, making it popular with traders who wish to trade their beliefs about mathematical patterns and probabilities
• Successful traders are able to make excellent returns for relatively little day-to-day effort, provided they are comfortable taking risk and are well prepared. This is the major attraction of all types of trading

Why Trade Forex - Text Version

Why Trade Forex?

With the recent popularity of Forex trading, many investors wonder why Forex is the way to go. Here are a few reasons which answer this question.

Why Forex? One of the reasons why people trade Forex is diversification. Just as every competent investor needs to diversify by asset classes and sectors, so too they need exposure to assets in multiple currencies and an understanding of Forex trends and what drives them.

Why Forex? Certain currencies tend to move with certain commodity prices. Having commodities exposure is a means of hedging this currency risk and playing Forex trends, so both Forex brokers and traders typically also deal with commodities. Thus while they are different asset classes, in practice Forex tends to include commodity trading and investing.

Why Forex? Forex has higher risk-adjusted returns. Forex is among the most rewarding asset classes for traders and investors. Although Forex has a reputation of being for short-term, high-risk speculators, there are trading styles suitable for both short term and long term traders:

More conservative active traders use longer-term holding periods and specific methods and instruments to reduce risk.

Long-term investors know how to:

• Ride stable, proven, long-term Forex trends for capital gains.
• Earn steady income from different kinds of currency trades or from investing in bonds, dividend stocks, and other income vehicles.
  

For those willing and able to handle more risk, and understand why Forex has become so easily implemented, the availability of leverage, or borrowed funds to control large blocks of currencies allows greater gains and losses. Using leverage creates unmatched profit potential for those with limited trading capital only if they learn how to control the downside risk. For example, with 100:1 leverage, a 1 percent move means 100 percent profit. It also means 100 percent loss. If not for this ability, why trade Forex?

If you know how to manage the risk of high leverage, you can grow your principal with leverage far faster than in other markets. And that is why Forex has taken center stage to all other investment vehicles.

Why Forex? A Forex trader can profit just as easily in a falling market as in a rising one.

During times when markets are in strong downtrends and the easiest profits and least risky trades come by betting that stocks or commodities will go down in price, regulators will impose restrictions that make betting on downtrends harder or impossible. Stock markets will see uptick rules or outright bans on short selling. Commodity markets will raise margin requirements so that such trades are more expensive and less profitable.

That can’t happen in Forex markets. In every single trade, we’re buying one currency and selling another, so it’s impossible to ban selling (or buying) of certain currencies without shutting down the entire Forex market. We’ll explain this in greater depth later. For now, just know that in Forex it doesn’t matter if markets are rising or falling. There are always ways to profit regardless of the trend.

If you’re heavily exposed to a certain kind of asset, you can hedge that position with a currency trade designed to move in the opposite direction.