Shared under ten

You can follow our portfolio and take advantage of it. Our portfolio is not a buy recommendation.
Menu
  • Benefits of Forex Trading
  • Benefits of Forex Trading

Benefits of Forex Trading

Why would you want to trade Forex?

The Forex market is also called the foreign exchange market or FX market and is the place where every currency in the world is bought and sold. This makes it the largest financial market in the world. There are several advantages to trading on this market such as longer trading hours , high liquidity and the ample opportunity to trade on margin . This article explains everything about this market and names a number of advantages to trading on the Forex market.

When you as a trader choose the market you want to trade on, you look at the best conditions to trade in. You want to make as much profit as possible and which market you choose logically depends (partly) on that. Millions of people trade on the Forex market and of course have good reasons for doing so. If you want to know more about trading in Forex, read the following article: ‘ What is Forex trading ‘.

Advantage 1: On the Forex market you can go both short and long

You can go short on all markets using so-called derivatives . These are for example CFDs or options. However, this is always linked to the Forex market because you sell currency X, also known as the quote currency, in order to buy currency Y (the base currency). The amount you pay for this transaction of the currency pair reflects the price of buying one unit of the base currency by selling the quote currency. This may sound a bit vague and that is why you will find an example below.

Imagine the Forex pair GBP/EUR. In this example, the British Pound is the base currency and the Euro is the quote currency. Let’s assume that this pair is at 1.12156. In that case, one British Pound is worth 1.12156 Euro. If you think that the Pound will outperform the Euro in the coming period, i.e. will rise against the Euro, then you invest in this pair and go long. On the other hand, if you expect the Euro to outperform and that the Pound will fall in value against the Euro, then you should sell the pair and go short. Your loss or your profit depends entirely on your prediction of what the currencies are going to do. You can make money regardless of the direction in which the market moves.

Going short can be done easily via CFDs, read more about taking short positions using a CFD.

Advantage 2: The long trading hours on the Forex market

The Forex market gives you the opportunity to trade virtually 24/7. This allows you to trade at very flexible times. The market is open 24 hours a day, 5 days a week. From the Netherlands, you can start on Sunday evening at 10 pm and continue until Friday 11 pm. These hours are much longer than other markets. This is because transactions on this market can be done directly between two parties. This is also called an OTC, an ‘over the counter’. In addition, this market is of course traded all over the world and the different time zones must be taken into account. This allows you to take advantage of the different sessions of the trading hours on the Forex market. Do not forget that the times change due to the transition from winter time to summer time and vice versa.

Is there also trading on the Forex market during the weekend?

That is a very useful and legitimate question. The answer for the retail investor is no. Only because of the different time zones you can trade in the Netherlands for two hours on Sunday evening. Furthermore, Central Banks can trade in the weekend and therefore prices can change during the weekend. In jargon this is also called ‘gapping’.

This is of course something to keep in mind when you are going to trade on this market. To counter the risks of such a weekend you can use stops and limits. So think about this carefully on Friday evening when the market is going to close for you.

Advantage 3: The large amount of liquidity in Forex

The Forex market holds the largest amount of liquid assets in the world. This makes the market very active as there are a huge number of buyers and sellers who are about to trade. Every day, over 5 trillion dollars in various types of currencies are traded by banks, companies, but also by individual traders. The vast majority of the trades are aimed at making a profit.

The high degree of liquidity in the Forex market provides an easy environment for trading. This leads to low transaction costs. This allows traders  to speculate  on market movements of just a few pips.

Advantage 4: Huge price volatility in the Forex market

Partly due to the large amount of liquidity, many transactions are made on the Forex market every day. You should think of trading billions of dollars per minute. Because of this, you see a lot of price changes in the value of the different currencies. In short, the currencies are very volatile.

You can use this  volatility . If you speculate on the right direction of the market, you can make a huge margin on an investment within a few minutes. However, this works both ways. If you bet on the wrong direction, you can also lose a lot of money in one go. Fortunately, there are various risk management tools to protect you against these types of risks. Furthermore, it is very important that you immerse yourself in the technical operation of the value changes of currencies so that you can predict the movements of the market well.

Benefit 5: Use leverage to make a big profit without a big investment

On the Forex market, you can usually trade in two ways, namely with  options  and  CFDs . With both methods, you can use leverage. This means that you can book a larger profit (or loss) with a small investment. You open a position on the market without paying fully for this position. The full value is later deducted from your profit. If you make a loss, you still have to pay the value that you initially did not pay.

For example, you are going to make a CFD transaction in the EUR/GBP currency pair. You are going to use leverage and you only pay 3.33% of the actual value of your transaction. You then make a profit when you sell your position again. The remaining 96.66% of the original value, which you had not yet paid, you now offset with the profit. This way you book a profit without a large investment.

However, you should realize that you can also make a loss and then also have to pay the original value. Before using leverage, consider whether you can handle the transaction financially.

Advantage 6: A wide choice of currency pairs

On the Forex market, almost all possible currency pairs can be traded. This gives you a huge amount of choice. You can make predictions based on everything that happens in the world and play on the relationships between large and small economies. You can also delve into a certain region and then start trading in this currency.

Advantage 7: Hedging in the Forex market

You could just read that you can earn a lot of money through the volatility of the Forex market. However, you can also make a lot of losses. To limit the risks, you can use hedging. This is a technique to limit the risks of a price movement that is not in your favor. You open a number of positions based on strategy to protect yourself. In this way, you can limit your possible losses through hedging.

The most used hedging technique on the Forex market is trading in different currency pairs. You do not invest in positively related pairs, which fall or rise with each other, but rather opposite pairs. When one falls, the other rises and so you can limit your losses. A short position on the EURO and Dollar pair protects you against a long investment on the Pound with Dollar.

You can also use the Forex market as a hedge technique to protect yourself on other markets. When certain commodities, in which you have invested, fall or rise, you will see this reflected on the currency market. For example, you can use the USD/CAD pair to protect yourself against falling oil prices.

Why would you prefer to trade Forex instead of, for example, shares?

To determine whether you would rather trade Forex than stocks, you need to have a good idea of whether the advantages of this market are interesting to you. The advantages are mentioned again below. Do not only look carefully at the possibilities to make a profit, but also at the risks. Are you very susceptible to these risks? Or do you know well how you can protect yourself against the risks?

  • The Forex market has much longer opening hours than the stock market. You can trade whenever it suits you. However, this also means that you have to keep a close eye on the market 24 hours a day. Pay close attention to your positions on Friday evening. Changes can occur during the weekend, while you cannot trade then.
  • The Forex market has an unprecedented amount of liquidity. 5 trillion dollars are turned over daily. Many more transactions are made than on the stock market and this gives you the opportunity to make margin more easily.
  • The Forex market is incredibly volatile, especially compared to the stock market. Thanks to this volatility, you can make a huge margin on a small position in the short term. Prices can also quickly develop to your disadvantage. Make sure you protect yourself well against this.

All in all, it is up to you to decide whether you are a suitable trader for this market.  Read more about Forex  and delve into the developments of the currency market.

Compare brokers and start investing in Forex

Are you excited about investing in Forex after reading this article?  Start comparing  and find the broker that suits you best!

Verder lezen?

Dit artikel is alleen voor abonnees van Aandelen Onder Een Tientje. Indien u nog geen abonnee bent, overweegt u dan ook een abonnement.

Bekijk abonnementen
Inloggen

Join thousands of others?

from €16.63 per month

Become a member now and get instant access to our entire platform. 

The value we offer:

  • Remarcable 29% profit in 2024
  • Get all analyses of stocks under a tenner
  • Get insight into our current portfolio
  • Receive weekly updates on our portfolio
  • Ask your general questions about our portfolio
Let's get started

Lees ook

No posts found!

CFD short position

CFD Trading: Going Long CFD stands for Contract for Difference . This is a simple way to trade that allows you to make the most of your money. A Contract for Difference is a binding contract, where the seller or buyer will pay the difference between the current value of a share and a future value, to the other at the time the buyer chooses to close the contract. Is the value greater? Then the seller of the contract (the broker) pays the buyer. Has the value decreased? Then the buyer must pay more to the seller. A CFD is a derivative , meaning that it derives its value from an underlying asset, often a stock or a market index. As the buyer of a CFD, you do not own the underlying asset and are never entitled to it. It is only used to value the contract. Taking a long position with CFDs ‘ Going long ‘ is simply buying a CFD position when you expect  the stock price  to rise. A ‘long position’ is taken when an investor believes the market will rise. This is a common way to  trade CFDs . Going long in CFDs is similar to the position you would take when buying shares, for example. As a trader, you first buy the position and then sell it at a later date to close out the trade. The difference between the purchase price and the sale price is the profit or loss made on the trade. The opposite of ‘going long’ is ‘going short’ or taking a ‘short position’. In this case you assume a decrease in value from which you can profit. Buy CFD: margin When you go long with CFDs, you don’t need to have enough money to buy the asset you are trading. The amount of money you need, or ‘margin’, depends on  the broker  and what you are trading. For example, for shares you might need 10% and for other securities it might be even less. This leverage allows you to make the most of your money, as the contract still benefits from the amount the asset changes in value. Simply put, if you only put down 10% and the underlying share increases in price by 10%, you have doubled your money. We will illustrate this with an example in which we also include the necessary incidental costs that come with CFD trading. Suppose you expect the shares of company X, which currently cost €1.25, to increase in value. You want to take a long CFD position for 1000 shares. The value of this is €1500, but you do not need that much cash. CFDs of 10% require a deposit of only €150. You also pay a small commission ( a spread ) to the broker. Two weeks later, the shares have each risen to €1.35 and you decide to close the CFD position. For every day that you hold CFDs, interest is charged. In effect, you are borrowing money to maintain your position in the shares. This interest is related to the bank interest rate. For this example, we assume that the interest is €5. You close the position with a profit of 10 cents per share and have to pay a trading commission again. The net profit is 1000 x 10 cents, minus two commissions and the interest, which totals €95. This is a profit of more than 60% of the stake. Long CFD trading, a profitable example To open a long position, you will need to place an order to buy the CFD you want. Each broker will use a slightly different method to place orders, but if you have bought a stock before, it is very easy to make the transition to CFDs. To go short, you need to place an order to sell the CFD. The way the order is placed depends on the broker you use. Opening the position Let’s say company XYZ is listed at €4.24 / 4.25. You expect the price to rise and decide to buy 15,000 shares as a CFD at €4.24. This bid price gives you a position size of €63,600 (15,000 x €4.24). Next, we assume a margin requirement of 10%. When placing the order, €6,360 is allocated from your account to the trade as initial margin. Be aware that if the position moves against you, i.e. the price falls instead of rising, it is possible to lose more than this margin of €6,360. For the same amount, you could only buy 1,500 shares with a regular stockbroker. In this example, commission is charged at 10 basis points (one basis point is 0.01 percentage points). So the commission on this trade is only 0.1% or approximately €63 (15,000 shares x €4.24 x 0.1%). You now have a position of 15,000 XYZ CFDs worth €63,600. Close CFD position A month later, the price of XYZ has risen to €4.68 / 4.69. Your expectation that the price would rise proves correct and you decide to take your profit. You sell 15,000 shares at the bid price, €4.68. The commission of 10 basis points will also apply to the closing of the transaction and amounts to €70 (15,000 shares x €4.68 x 0.1%). The gross profit on the transaction is calculated as follows: Slot level: €4.68 Opening level: €4.24 Difference: 0.44 Gross profit on the trade: €0.44 x 15,000 shares = €6,600. After deducting the commission costs (€63 + €70) from the total turnover, you realise a profit of €6,467. To determine the total profit on the transaction, you must also take into account the commission you paid and interest and dividend adjustments. Long CFD trade, a loss-making example It is also possible that the CFD does not do what you expected in advance and decreases in value while you have opened a long position. With this calculation example we show what the financial consequences of this are. Shares in company ABC are traded for €8.33 / €8.34. You think the price

Lees verder >
01/09/2025

What is a share?

Een aandeel is eigenlijk een stukje van een bedrijf. Met één of meerdere aandelen ben je voor dat deel financieel eigenaar van een bedrijf. Gaat het goed met een bedrijf, dan profiteer jij hiervan. Lees meer…

Lees verder >
12/05/2024

Preferred shares

Preferente aandelen geven jou extra voordelen over gewone aandelen. Zeker als je graag een vast dividend ontvangt. Lees meer…

Lees verder >
12/05/2024