Why trade forex: The go-to-market for day traders

In the vast ocean of financial markets, Forex (foreign exchange) stands out as the most popular choice.

Often when traders think of global markets, it's the currency market that springs to their minds.

Two main reasons make Forex the preferred trading arena for so many day traders.

It’s not only the world’s largest financial market, but it is also available for traders 24/5.

In this guide, we delve into the intrinsic qualities of forex, unveiling why it stands as the go-to choice for those looking to make the most of every trading day.

Let’s get into it.

What is forex trading?

Forex trading, also known as foreign exchange trading or currency trading, involves buying and selling currencies on the foreign exchange market to make a profit.

What is the forex market?

The forex market, short for "foreign exchange market," is a decentralised global marketplace where currencies are traded.

It's the largest and most liquid financial market in the world, operating 24 hours a day, five days a week, with participants ranging from central banks and financial institutions to individual retail traders.

Within this market, currencies are exchanged at current or determined prices, facilitating international trade, investments, and monetary policy implementation.

What are the benefits of forex trading

As we mentioned above, the foreign exchange (Forex) market is the world's largest financial market, with over $7 trillion traded daily.

Let's take a deeper look into the primary benefits of trading forex, and to understand why this market is the favoured choice for many.

1. Forex is the most liquid market in the world

Liquidity refers to the ease with which assets or securities can be bought or sold in the market without causing a drastic change in their price. Given its vast trading volume, there is always a buyer or seller available, ensuring that traders can enter or exit positions almost instantaneously.

2. It is accessible to everyone

With a vast number of online trading platforms and brokers available, even individual traders with modest capital can start trading. All that's required is a computer or smartphone, an internet connection, and a relatively small amount of capital.

3. 24-hour market

Unlike stock markets which have specific opening and closing times, the forex market operates 24 hours a day, five days a week. This is due to its decentralised nature, with major trading centres located in various time zones around the world, including Tokyo, London, New York, and Sydney. This offers traders flexibility, allowing them to trade at any time it suits them, be it after their day job, in the middle of the night, or during the day.

4. Forex offers high leverage

Offering high leverage means traders can take a large position with a small amount of capital. For example, with leverage of 100:1, a trader can take a position worth $100,000 with just $1,000 in their trading account. However, this does not only magnify potential profits but also potential losses as well, so traders need to take this carefully into consideration.

5. Diverse trading opportunities

The forex market includes a large list of currency pairs, each representing the value of one currency relative to another.

This diversity offers traders a myriad of trading opportunities, from major currency pairs like the EUR/USD to more exotic pairs.

Factors influencing one currency pair might be different from another, allowing for a broad spectrum of strategies and trading scenarios.

6. Low transaction costs

Most forex brokers earn through the spread, which is the difference between the bid and ask price of a currency pair. In comparison to other markets, transaction costs in the Forex market are relatively low, especially when trading major currency pairs.

7. No central exchange

The forex market operates over the counter (OTC), meaning there's no centralised exchange like there is for stocks. This decentralised nature provides traders with the flexibility to trade directly with other participants in the market, whether they are banks, financial institutions, or individual traders.

Different types of forex markets

To understand the complete structure and functioning of the forex market, it's essential to recognize its different types or segments. Here are the primary types of forex markets:

1. Spot market

The spot market is where currencies are bought and sold based on their current price. It is the most straightforward type of forex market and is what most people refer to when they talk about forex trading. Transactions in the spot market are settled "on the spot," meaning trades are delivered within two business days.

2. Forward market

In the forward market, contracts are bought and sold over the counter between two parties, who determine the terms of the agreement between themselves. They decide upon the contract's size, settlement date, and exchange rate.

Unlike the spot market, the forward market doesn't require immediate settlement. Instead, the transaction is settled at a specific date in the future, which can be days, months, or even years later, as per the agreement.

3. Futures market

The futures market is similar to the forward market, but there's a significant difference: futures contracts are traded on exchanges, not over-the-counter. This means the contracts come in a standardised format.

As a result, they are more transparent and are available to individual traders. Unlike forward contracts, futures contracts are legally binding to all parties involved.

4. Swaps market

Currency swaps involve the exchange of one currency for another at a predetermined rate and a future date. This market mainly caters to banks and financial institutions, allowing them to manage their liquidity needs and hedge against currency risks over longer periods.

5. Options Market

In the forex options market, traders can purchase the right, but not the obligation, to buy or sell a currency pair at a set price on or before a specific date.

There are two primary types of options: call options (which give the holder the right to buy) and put options (which give the holder the right to sell). Forex options trading can be used for speculative purposes or to hedge against potential losses in other trades.

Forex terminology everyone should know

Here is a list of essential forex terminology that every trader and enthusiast should be familiar with:

1. Base currency: The first currency in a currency pair. For instance, in the EUR/USD pair, the EUR is the base currency.
2. Quote currency: The second currency in a currency pair. In the EUR/USD pair, the USD is the quote currency.
3. Pip: The smallest price movement in the forex market, typically the fourth decimal point in most currency pairs.
4. Lot: A standard unit of a transaction in the forex market. A standard lot represents 100,000 units of the base currency.
5. Leverage: A tool offered by brokers that allows traders to control a larger position with a small amount of capital.
6. Margin: The amount of capital required by a broker to maintain an open position.
7. Spread: The difference between the bid and ask price.
8. Bid: The price at which the market (or your broker) will buy a specific currency pair. This is the price at which traders sell.
9. Ask: The price at which the market (or your broker) will sell a specific currency pair. This is the price at which traders buy.
10. Long: Taking a 'buy' position, expecting the price of the currency to rise.
11. Short: Taking a 'sell' position, expecting the price of the currency to fall.
12. Slippage: The difference between the expected price of a trade and the price at which the trade is executed.
13. Stop-loss order: An order placed to sell a currency when it reaches a particular price point, used to limit a trader’s losses.
14. Take-profit order: An order placed to lock in a specific amount of profit once a currency reaches a certain price.
15. Liquidity: Refers to the ability of an asset or security to be quickly bought or sold in the market without causing a significant price movement.
16. Broker: An individual or firm that facilitates trading for investors.
17. Swap: A rollover fee or credit for holding a currency pair trade overnight.
18. Bullish: A market sentiment where prices are expected to rise.
19. Bearish: A market sentiment where prices are expected to fall.
20. Volatility: Indicates the level of price movement or fluctuations over a specific period.
21. Resistance: A price level where a currency pair tends to find difficulty rising above.
22. Support: A price level where a currency pair tends to find support and doesn't usually fall below.
23. Fundamental analysis: Analysing the broader economic and political factors that may influence currency prices.
24. Technical analysis: Analysing historical market data, primarily through the use of charts, to forecast future price movements.

How to start trading forex?

Starting your forex trading journey should not be hard if you follow these essential steps:

1. Educate yourself: Before diving into forex trading, familiarise yourself with the basics of the market, trading strategies, and risk management techniques.
2. Choose a reliable forex broker: Research and select a reputable broker that offers a user-friendly trading platform, low fees, good customer service, and is regulated by recognized financial authorities.
3. Open a trading account: After selecting a broker, you'll need to provide some personal details and financial documents to open a trading account.
4. Start with a demo account: Most brokers offer a demo account where you can practise trading with virtual money. This helps you get familiar with the platform and develop your trading strategy without risking real money.
5. Fund your account: Once you're confident, deposit real money into your trading account. Make sure to start with an amount you're comfortable potentially losing.
6. Analyse the market: Use both fundamental (economic and political news) and technical analysis (chart patterns and indicators) to assess potential market movements.
7. Set your trading plan: Determine your entry and exit points, set your stop-loss and take-profit levels, and decide on the size of your trade.
8. Start trading: Buy (go long) if you expect the currency to rise in value and sell (go short) if you expect it to fall.
9. Monitor and adjust: Keep an eye on your trades and the market. Adjust your strategy based on market movements and your trading performance.

Forex vs Forex CFDs: What is the difference?

Forex spot trading

When you engage in traditional forex trading, you're essentially buying one currency while selling another at the current exchange rate.

You're expecting the bought currency to appreciate relative to the one you sold. This type of trading is typically done in the spot market, where transactions are settled "on the spot" or within a short period.

Forex CFDs (Contract for Differences)

CFD trading, on the other hand, does not involve the direct exchange of currencies. Instead, traders enter into a contract with a broker, agreeing to exchange the difference in the value of a currency pair between the time the position is opened and when it is closed.

You're not buying or selling the actual currency, but instead speculating on its price movement. CFDs are typically leveraged products, meaning you only need to deposit a small percentage of the full value of your position, leading to magnified profits or losses.

Read also this interesting article: The ultimate guide to opening a Forex CFDs trading account

Final thoughts and conclusion

Forex offers unparalleled opportunities due to its expansive market and unique benefits.

Whether you're navigating through the diverse types of forex markets or understanding essential terminologies, a deep knowledge of forex is indispensable.

As with any trading venture, starting in forex requires a systematic approach and understanding the nuances, such as the difference between traditional Forex trading and Forex CFDs.

For those keen to explore the dynamic world of Forex CFD trading, markets.com is a trusted platform to kickstart your journey.

Dive into the world of forex today and harness its vast potential for your trading aspirations.

Catch up on this related article as well: 10 tips on how to trade CFDs on forex for beginners

“When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.”