8 Essential Benefits of Trading Forex
What are the benefits of trading Forex?
Forex stands for foreign exchange or currency trading, it’s a global market, incredibly liquid, with a vast daily trading volume. As with many investments, foreign exchange trading is not for the faint-hearted or the novice trader. That said, there are many benefits of trading Forex that give the Forex market some unique benefits after you’ve learned the ropes.
What are some of the many benefits and advantages of trading Forex?
The massive decline in the US dollar since the beginning of 2002 has opened many investors’ eyes to the global currency markets. Trading in these markets is a ’round the clock’ business, with a market always open somewhere. For investors considering currency trading, here are eight of the benefits that these markets have over other financial markets.
ETFs without brokerage fee! ETFs are the smartest way for investors, industries, and foreign markets to play. Learn how to buy ETFs like the QQQ without a brokerage fee in DRIP Investor.
Here are the main benefits and reasons why people are choosing to trade Forex:
#1. Market size
The foreign exchange market is the largest financial market in the world. The liquidity that comes from a market that trades close to $6 trillion daily allows you, as an investor, to easily enter and exit your positions without worrying that the price will jump too far before making your trade to run. A market of this size also makes it harder for a single group to manipulate the market. This means that your supply and demand analysis is most likely more accurate.
#2. High liquidity
Due to the Forex market being so vast, it is also extremely liquid; this is an advantage because it means that you can immediately buy and sell under normal market conditions with one mouse click, as there is usually someone in the market who is willing to take over the other side of your trade.
One of the benefits of Forex trading is that Forex is the most liquid market in the world. Why is that? Because there is a constant supply and demand for money. With a good Forex broker and fast execution speeds, you never have to worry about getting stuck in a trade. You can also set the online trading platform of your choice to automatically close your position once it reaches your desired profit level, this is called a limit order. You can even set to close trades when a trade runs against you, and this is known as setting a stop loss.
#3. Little-to-No Commissions
Another benefit of trading is that there are very few Forex brokers that charge commissions to their clients. No exchange fees, no clearing fees, no government fees, no brokerage fees. Most retail brokers get compensated for their services through what is called the “bid/ask spread”.
You never pay a sales commission when you trade currencies. Stockbrokers, even discount brokers, charge you a commission on every trade you place – both to get into a position and to get out of one. There are no commissions on the foreign exchange market. You only pay the difference between the bid and ask prices you pay on the stock market, in addition to your commissions.
The transaction costs of Forex brokers are low
The retail transaction costs (the bid-ask spread) are normally less than 0.1% under normal market conditions. For larger traders, the spread could be as low as 0.07%. Of course, that depends on your leverage and more of that will be explained later.
#4. Tax Benefits
Yes, there are even tax benefits of trading Forex. The values of currencies are constantly changing, and investors can speculate on Forex accounts and benefit from trading currencies. Because there are different types of currency trading, there are various ways for investors to claim profits or losses on their taxes. Each way offers advantages and disadvantages, depending on whether the Forex account makes an overall profit or not. However, investors must decide how to submit their taxes before trading, and non-denominational investors could be caught later.
Tax advantages of Trading Forex
Traders use Forex to buy and sell foreign currencies. With the Forex market as the largest financial market in the world, it offers investors many benefits, including favorable taxes.
“Forex options and/or futures are grouped in what are known as IRC Section 1256 contracts. These IRS-sanctioned contracts mean traders get a lower 60/40 tax consideration. This means that 60% of gains or losses are counted as long-term capital gains/losses and the remaining 40% as short-term.” – Investopedia, Forex Taxation Basics
Currently, short-term capital gains are taxed at your current tax rate, and long-term capital gains are only taxed at 15%. Obviously, it’s better to pay less tax. In the Forex market, it matters to investors whether they take over their profits one minute after entering a trade or a month after entering a trade: the first 40 percent of their profits are immediately taxed. Long-Term capital gains and the remaining 60% are taxed on long-term capital gains.
The two-main tax benefits this treatment for Forex traders are:
Many Forex futures/options traders make several transactions per day. Of these trades, up to 60% can be counted as long-term capital gains/losses.
2. Tax Rate
When trading stocks held less than one year, investors are taxed at the same rate as their ordinary income. When trading futures or options, investors are taxed at a 23% rate (calculated as 60% long-term x 15% max rate + 40% short-term rate x max income tax rate).
Consult with a qualified tax advisor
Of course, this is not a solicitation of tax advice, you should speak to your qualified tax advisor about filing this form Gains and Losses From Section 1256 Contracts and Straddles.
#5. Profit potential
Perhaps the single greatest advantage of trading Forex is the high profitability. Profit potential is what every investor wants to hear, and the foreign exchange market has plenty of it. You can earn money in the Forex market, whether currencies go up or down.
Profitability from both rising and falling prices
While the above Forex benefits are quite remarkable, selling currencies without first acquiring them is one of the major advantages of Forex trading. The main trading philosophy is to buy low and sell high, but with Forex you can also sell high and buy low. In this way, you can make profits in both a downtrend and uptrend market.
The foreign exchange market has no restrictions on directional trading. That is, if you believe that a currency pair is gaining value, you can buy it, or ‘go long.’ Similarly, if you think it might lose value, you can sell it, or ‘go short.’
While it’s possible to short stocks and futures, it’s much more complicated. For currencies, you can simply sell the assets if you think the trend is going down with just one click.
- If you think a currency pair is going up, you buy it.
- If you think a currency pair is going down, you sell it.
As simple as that.
#6. Guaranteed Stops
You have the opportunity to determine in the Forex market what price you want to enter a trade and at what price you want to end a trade and these prices are guaranteed. A stop or stop loss order is an order that instructs your broker to stop trading when the price ever drops to a certain level. Imagine a stop-loss order as a stop sign for your trade. If your trade ever reaches the stop-mark – the price at which you want to end your trade – it stops immediately and goes out, so you can protect your money.
#7. Trading hours
Some upsides to trading Forex do include the ability to trade on margin, higher liquidity, and the flexibility to trade around the clock from Sunday through to Friday.
The foreign exchange market is open 24 hours a day, almost seven days a week. Whether you work during the day, go to school at night or get up early, you can find a time to trade currencies. Also, different currencies are more active at different times during the day, so whenever you have time, something will happen that you can use.
Forex is an over-the-counter (OTC) market, which means trades don’t take place through a centralized exchange, like shares or indices for example. FX trading takes place across the globe, around the clock, from Sunday night through to Friday night.
So, unlike any other financial markets, you can almost always respond to currency price fluctuations caused by economic, political and social events as they occur, without having to wait for markets to open.
Currency markets offer price volatility 24 hours a day, so whatever your trading strategy, there is the potential to find numerous trading opportunities. This also means that the markets are constantly moving, which places even more emphasis on monitoring your positions and using the appropriate risk management tools.
#8. Increased Leverage
This may be the most attractive asset to more aggressive investors. Higher leverage allows you to control a large inventory of currencies in advance with very little money. For example, if you have a 100: 1 leverage, you can control $ 100,000 in the foreign exchange market with as little as $1,000 in your own account. This means that you realize all the profits in a $ 100,000 position while risking only a small part of your own money. Now the opposite is the case. You can also see all losses on a position of $ 100,000. So be aware that leverage is a double-edged sword and you should use it with care.
Leverage lets you trade with less money.
Most people would think that getting started as a currency trader would cost a ton of money. The fact is that it is not compared to trading stocks, options or futures. Online Forex brokers offer “mini” and “micro” trading accounts, some with a minimum deposit of just $10 or $25.
We do not say that you should open an account with the bare minimum or utilize a broker that offers such low deposits, but it makes Forex trading much more accessible to the average person who does not have a lot of starting capital to trade with.
The risks and rewards of trading with more leverage
In Forex trading, a small deposit into your trading account can control a much greater total currency contract value. Leverage gives the trader the opportunity to make a nice profit while keeping the risk capital to a minimum.
For example, In the USA, a Forex broker can offer leverage of up to 50 to 1, which means that a deposit of $50 allows a trader to buy or sell $2,500 in foreign exchange. Similarly, you could trade $500 for $25,000 and so on.
While this is all excellent news, let’s remember that the leverage is a double-edged sword. Without adequate risk management, this high level of leverage can lead to both substantial losses and gains.
Main advantages and benefits of Forex trading
Trading has developed enormously over the last two decades, and today everyone can trade, though trading is not for everyone.
If you are considering becoming a trader, you should first ask, “Which market should I choose?”. You can think about futures, options, energies, stocks or currencies.
While every market has its appeal, the benefits of trading Forex are underestimated. At Global Currenciez we’ll show you the key benefits of this market and to give you the knowledge you need to trade currencies online and be successful.
Forex trading has become widely available in recent decades, and nowadays more and more people are wondering what the main benefits of Forex trading are. Some of these people are familiar with online trading on stocks. However, it is essential to understand what advantages Forex offers compared to the stock market.
We’ve just covered the main advantages of the Forex market, but again, you must be fully aware of the dangers of trading Forex as well.
The Benefits of trading Forex should be considered in light of the risks
The benefits of foreign exchange trading are significant, and they keep new traders on the market every month. However, traders should reconcile these benefits with some of the associated risks. A 24-hour market can also mean that if you do not look at the screen, a short move can happen against you, as happened with the British pound flash crash during Asian trading in October 2016. Most Westerners did not look at the market at the time.
In most markets, there is plenty of liquidity when you least need it, and liquidity can be scarce when you need it most. The scarcity of liquidity occurs because those who try to trade are sometimes unsure about prices and are usually mistaken if they give you a worse price.
Although transaction costs are low when you trade the foreign exchange market, you should still be careful that more trading is not always better. Traders could still benefit from a longer, less active trading strategy that would give them the most advantage of the low cost of Forex trading. The permitted leverage can be a double-edged sword that carries as much risk – if not more risk – than the benefits of leverage. Leverage feels good when a trait works in your favor, but it will often aggravate the situation if you have no plan to break out of a lossy trade. Profit potential from rising and falling prices is an extreme advantage, as the obstruction of short selling that we see in other markets is not seen on the Forex market. But such ease in selling a market can also make it much easier for a trader to become path-dependent and lose hope that the market will eventually move in his favor.