Forex or the foreign exchange market is a decentralized or over-the-counter (OTC) market whereby currencies are traded at current or determined prices. This market brings together central banks, investment banks, commercial banks, hedge funds retail traders among other professions. According to the Bank of International Settlements (BIS) last triennial survey, the size of the forex market turnover was $5.2 trillion as of 2016. The forex market is thus the biggest financial market in the world. Here are top 5 reasons to trade forex/currencies:
Investing in FX market allows investors to balance their portfolio more particularly if it is heavily centered in the US equities. Currencies move relative to each other and therefore the returns in the forex trade are two ways, because an investor can make profits if the currencies drop or rise depending on how they had predicted the possible movement.
2. Market Transparency, Liquidity and Accessibility
Forex traders have access to their account at all times 24/7 and on a real-time basis. The events and the news that impact the currency movements are available for every investor globally. It is possible for any investor from any part of the world to do their own analysis on how certain events are likely to impact a given currency by following the monetary flows and events that influence a country economic stability. The forex market is growing and is highly liquid and decentralized as there is no central trading location or exchange. Most of the forex trading is done through electronic trading networks and thus allowing market participants to react to economic events and currency movements.
FX trading allows for the use of leverage of up to 50-1 which means that investors have the ability to control a large amount of one currency using a small percentage of its true value. The use of leverage creates a greater opportunity to profit when used prudently though can work or fail you.
In the year 2000 and 2008, the U.S Congress passed legislation that require firms that act as counterparties to retail forex transactions, as well as forex pool operators, CTAs and introducing brokers to register with the Commodity Futures Trading Commission (CFTC) and to become members of the self-regulatory organization for the U.S. derivatives industry, the National Futures Association (NFA). Good regulation is an excellent boost to the confidence of the forex traders.
5. No Commission Fees
Most FX accounts trade without exchange fees, data licenses, and commissions. Besides paying the cost of paying establishing spread between the buying and the selling price, there are no other major charges. There may be charges however if you opt to use a dealer as they can charge you for the services provided. Dealers are required to disclose their charges to their customer prior starting to trade and they should pay no more than two pips on majors.
Among other reasons to trade forex are that it helps to hedge against the political and event risk, acts as a global economic hedge and also offers a potential for capital appreciation.