What Makes Forex Trading Attractive?
Benjamin Tay, Senior Dealer
Benjamin graduated from the State University of New York at Buffalo with a Bachelor’s degree in Business Administration. He believes that a strong foundation is absolutely necessary to succeed in the financial markets.
Therefore, he enjoys sharing his knowledge and experience to help others succeed. In his free time, he enjoys reading books on business, fish keeping and spending time with his family.
In a world where the click of a button can send goods across oceans and digital transactions can bridge financial gaps in seconds, the fascination with forex trading has never been more pronounced. The familiar jingle of “Shopee!” serves as more than a catchy tune—it embodies the dynamic growth of online shopping and the pivotal role of currency exchange in global commerce. But what exactly makes forex trading so fascinating? Why do individuals and corporations alike gravitate towards this market, and what opportunities does it present in a world where digital transactions and international trade are only expected to expand?
Let’s dive deeper and uncover the compelling reasons behind what makes forex trading attractive.
The realm of online shopping has seen its revenue and volume continuously expand. In 2014, global retail e-commerce sales amounted to US$1.33 trillion. Fast forward ten years, worldwide retail e-commerce revenue is projected to surpass US$6.33 trillion in 2024.
Source: Statista.com [1]
This represents nearly a fivefold rise in consumer spending on e-commerce platforms!
It is widely understood that goods purchased online are manufactured in and often exported from Asian countries such as China. Consequently, businesses engaged in international trading are required to hold multiple currencies as exporters typically prefer to make transactions in US dollar (USD) or their local currency.
Therefore, businesses have flocked to the forex markets to hedge against currency fluctuations, hoping to save thousands, if not millions of dollars.
Source: Statista.com [2]
With e-commerce expenditure predicted to continue its upward trajectory, and considering that USD, Euro (EUR), British pound sterling (GBP), and Japanese yen (JPY) are the most widely used currencies for international SWIFT transactions, the question arises: Should you consider trading forex?
4 Huge Advantages of Trading Forex CFDs
Forex CFDs cater to diverse investment needs and strategies. Here are some of the significant advantages of trading forex CFDs:
Advantage #1: Leverage and Capital Efficiency
Source: freepik.com [3]
Forex trading allows you to increase your market exposure through leverage. Leverage not only magnifies gains and losses, it also helps you to manage substantial positions with a relatively modest amount of capital, potentially enhancing your returns.
In Singapore, licensed brokers allow a maximum of 20x leverage for forex trading. It is common to hear of off-shore brokers offering as much as 200x leverage. However, it is crucial to be mindful of the increased counterparty risk and the possibility of limited recourse.
Advantage #2: Accessibility
The forex market operates 24 hours a day, five days a week. This allows you to trade at your convenience, regardless of time zone. It’s worth noting, however, that there are optimal trading times for certain currency pairs.
Advantage #3: Diversification
Source: freepik.com [3]
Diversification is a fundamental principle of portfolio management, aimed at mitigating risk by spreading investments across multiple asset types. Forex trading allows you to diversify your investment portfolios beyond the traditional asset classes of stocks and bonds.
Unlike equities, where company-specific reasons can impact returns, currency markets are driven by macroeconomic and geopolitical events. As a result, the forex market often exhibits low correlation with other asset classes, making it an excellent diversification tool. Having currency assets in your portfolio will likely lower your overall portfolio risk and increase risk-adjusted returns.
Advantage #4: High Liquidity
Source: freepik.com [3]
The forex market boasts unparalleled liquidity in the financial world. It is far more liquid than other financial markets, with an average daily trading volume of over US$6 trillion. This immense liquidity allows market participants to enter and exit positions quickly at fair market pricing.
Whether you’re trading major currency pairs like EUR/USD or exotic ones like USD/SGD, liquidity remains continuously high throughout the trading day. Unlike less liquid markets where huge transactions can cause significant price movements, the forex market absorbs large orders with little impact on pricing, giving traders confidence and efficiency when completing trades.
2 Risks of Trading Forex CFDs and How You Can Reduce Them
While the advantages of trading forex CFDs are compelling, it is also essential to acknowledge the associated risks. Here’s a look at two common risks and suggestions on how you might manage them:
Risk #1: Market Volatility
Source: freepik.com [3]
While traders often welcome volatility for the trading opportunities it presents, too much volatility can result in heart-stopping events. Large amounts of volatility may cause dramatic shifts in the bid/ask spread, inadvertently triggering stop-loss orders and creating a less favourable trading environment.
How can you lessen the likelihood of this occurring?
You could explore trading major currency pairs like EUR/USD which tend to be more stable compared to exotic pairs such as USD/ZAR and USD/RON. You should also be aware of economic and geopolitical events that are likely to raise volatility. It is prudent to avoid trading in the immediate lead-up to and during such announcements to minimise exposure to unpredictable market movements.
Risk #2: Counterparty Risk
Source: freepik.com [3]
Forex trading is conducted over the counter (OTC), which means that trades are executed directly between counterparties rather than through a centralised exchange. This decentralised system provides flexibility and accessibility but also exposes you to counterparty risk.
Counterparty risk is the possibility that the broker or financial institution supporting the trade would default on its obligations, resulting in financial losses for you. While respectable brokers use risk management techniques to protect customer assets, unexpected occurrences like bankruptcy or fraud can jeopardise your wealth.
In order to reduce counterparty risk, select licensed brokers that boast a strong reputation for reliability. Ensure your trading funds are kept separate from the broker’s operational funds to safeguard against misuse, and conduct regular due diligence on your broker’s financial health and regulatory compliance.
Source: freepik.com [3]
It is also important to determine the country where your broker is regulated and whether the government provides adequate oversight.
A broker regulated in a well-regarded financial centre known for strict regulation offers added reassurance.
Hint: Singapore is a leading financial hub renowned for its robust regulatory framework. As a result, you should consider trading forex CFDs with a local broker, such as Phillip Securities.
Source: Visual Capitalist [4]
Conclusion
Forex trading presents an appealing financial avenue for retail traders due to its inherent benefits. From leverage and capital efficiency to accessibility and diversity, forex trading offers opportunities to increase returns while managing risk across various asset classes.
Furthermore, the forex market’s unrivaled liquidity assures rapid trade execution, which will boost your confidence and flexibility. However, understanding the hazards of forex trading, including market volatility and counterparty risk, is critical. Reducing these risks necessitates a prudent approach, such as focusing on major currency pairs, staying informed about economic events, and selecting reputable brokers (such as Phillip Securities) regulated in well-established financial centres such as Singapore.
In essence, by understanding both the potential and hazards of forex trading, you can confidently navigate the dynamic terrain of global finance. This knowledge positions you well to navigate the ever-evolving market landscape, paving the way for sustained success.
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