Why Do People Trade Forex?

With the development of the market, foreign exchange (forex) trading has become a heated topic among investors, and forex has become a popular investment and financial choice. The purpose of any investment is to be able to make more money. Faced with so many investment products, why would we choose foreign exchange investment over others？

Ask three different people about this and you will get more than three different answers. However, the most common answer is: to make money. While money can't buy everything, we all live in a world where money makes life happier, so that's a perfectly legitimate motivation.

Some people trade foreign exchange because they see it as some form of guessing and gambling. It's really fun, especially when you guess right. Others just want to experience the personal fulfillment in the process of having the trading system work the way they want it to and come up with the results they want. In any case, we will usually be happy when we have made the right choice and come away with a full profit as a result.

Generally speaking, there are several reasons for choosing forex trading:

Flexible Trading Hours

One of the reasons we trade forex is because of its flexible trading hours. The foreign exchange market is traded 24 hours a day, five days a week, from 5:15 am on Sunday to 5:00 am on Saturday, Beijing time. 24-hour trading means that there are no trading gaps, and investors can adjust to political, economic, technical and fundamental factors in a timely manner without having to wait for the market to open to trade. The stock market can only be traded at certain times of the day, usually from 9:30 am to 3:00 pm, which is not suitable for office workers.

Given that most foreign exchange transactions are conducted online, and major forex brokers are located all around the world, their trading hours are much longer than the opening hours of the Nasdaq or the New York Stock Exchange - the forex market trades 120 hours per week, the US stock market trades 32.5 hours per week and the Chinese stock market trades 20 hours per week. This provides investors with great night trading opportunities.

Variety and Diversification

Foreign exchange investment is mainly divided into three categories - currency investment, commodity investment and index futures contract investment. Although there is a wide variety of investments, the cost of analysis for investors is lower and the concentration is higher compared to the stock market.

Diversification in forex trading is a big advantage. Since every investor who needs to stay competitive needs to diversify his assets into different categories, he needs to convert them into assets in multiple currencies, which is why foreign exchange trading is so popular.

Low Starting Threshold &Low Account Costs

Forex trading can be started with just a few hundred dollars or even less. As the world's largest trading market, whether it is a banking institution, a corporate institution or an individual, all can participate in foreign exchange transactions. Its trading environment and trading rules are relatively transparent and fairer to individual investors.

Forex brokers can often provide free full-featured trading platforms and data, and the better ones offer free training materials and market analysis. With online stock brokers, on the other hand, traders usually need to maintain a minimum trading volume or reach a minimum monthly trading volume before they can access similar services.

In addition, brokers often offer practice trading accounts or demo trading accounts with full functionality to allow those smart beginners to get trading experience and practice fiddling with their money as much as possible before they are ready to take risks with their own money.

At the same time, most forex brokers do not charge any commissions or hidden fees. They profit from the spread, which is the difference between the bid and the seller. Depending on the size of the trade, a typical spread of two pips means that the cost between opening and closing a trade is roughly between $0.2 - $20. In general, these costs are very competitive compared to the commissions charged by online stock brokers.

Transparent & Fair Market with Regularity

The foreign exchange market has been gradually opening up in major cities around the world since 1973. After decades of development, the foreign exchange market has become a unified market. It is a market made up of different national banks and a number of investment institutions, and the daily foreign exchange transaction volume can reach 5 trillion US dollars, which is beyond the reach of any financial institution. At the same time, this also determines the standardization of the foreign exchange market, indicating that it will not be manipulated by any country, bank or large investment institution and that all traders in this market can use their own wisdom to win profits. In addition, the foreign exchange market is also a market with a clear pattern of fluctuations, which is determined by the characteristics of the foreign exchange market itself. It is a barometer that reflects the economy and future prospects of various countries, and any international political events and news can be quickly digested by the foreign exchange market.

Leveraged Trading

Forex trading is a margin trading (leveraged trading) product. You only need to pay a small percentage of the contract value as initial margin for the trade. This means that investment returns and investment losses are higher than traditional cash transactions.

The reason why foreign exchange trading is loved by so many investors at home and abroad is because of its leverage, which can magnify your income. Currently, the United States can provide 50 times of trading leverage on the international formal platform, and the United Kingdom and Australia can provide up to 400 times. With the same amount of leverage, you can get several times of returns in the foreign exchange market, which is a shortcut that allows many investors to quickly accumulate wealth.

Liquidity

We also trade forex because it offers the best liquidity. A market with sufficient liquidity is defined as a market with many buyers and sellers at the same time. The more buyers and sellers there are at the same time, the more likely you are to get a fair price in a purchase or sale. The more liquid a market is, the more difficult it is for large traders within the market to gain an advantage by manipulating prices. Unlike in the stock market, in the foreign exchange market, even the largest traders (the most extreme example being the central banks of various countries) will encounter considerable resistance when trying to manipulate the price action of major currency pairs over a slightly longer period of time (more than a few hours).

Decentralization

People also trade forex because there is no centralized exchange and there are no expert brokers who have the monopoly power to manipulate market prices. In most stock markets, a single individual or institutional investor, acting as an expert broker, tends to have a firm control over the bid-ask spread of a particular stock in buying and selling activities. In theory, they are monitored and regulated so that they cannot abuse their power at will and manipulate prices for personal gain at the expense of the trading public. But in fact, these expert brokers are very sophisticated and have their own strategies for when and how to circumvent regulation to a certain extent, so that they can force ordinary investors to buy at higher prices and sell at lower prices. In forex trading, there is no single expert broker that manipulates the exchange rate of a single currency pair. Instead, there are multiple exchanges and brokers competing to take your business.

Less Slippage

Another reason to do forex trading is due to its highly liquid and decentralized market, which also means less slippage. The so-called “slippage” refers to the difference between the price you set and the actual transaction (buy or sell) price. Slippage is more likely to occur in less liquid markets because there are fewer traders with whom you can trade against. There is less chance of slippage taking place in the foreign exchange market because:

First, the forex market is usually highly liquid, running at full speed 24/7, with exchanges in more than one country trading more than 5 days a week, and much larger trading volumes than the stock market.

Second, there is no expert broker to influence the price. In fact, many foerx market makers promise some kind of “no slippage” policy, which reduces price uncertainty.

Unaffected by Economic Crisis

In a global financial crisis, stock markets fall, real estate transactions are frozen, and retail businesses can suffer huge losses or even go bankrupt. By contrast, foreign exchange remains profitable even in the worst economic situations because currencies are always traded in pairs. When one currency falls, the other always appreciates, regardless of market conditions.

In spite of the various reasons for choosing foreign exchange trading that has been discussed above, investors should bear in mind that trading foreign exchange carries a high level of risk and may not be suitable for all investors since leverage can work both to your advantage and disadvantage. As a result, investing in forex products may not be a wise choice because you may lose all your invested capital. You should not risk more than you are prepared to lose. Before deciding to trade, you need to ensure that you understand the risks involved and take into account your investment objectives and level of experience. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor.

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