As the largest market on earth, today’s foreign exchange market offers a wealth of potential opportunity.
The sheer size of this market should not deter new traders, however, as the forex market may offer some advantages to those just getting their feet wet in the world of trading.
Here are three reasons that forex can be a great market for novice traders:
- The ability to choose leverage: As a new trader, your focus should be on learning the markets and capital preservation. While forex markets may allow the use of a great degree of leverage, they also allow traders to trade using only small amounts of leverage. This means that in today’s forex markets, you can begin trading with a small amount of capital—$100 or possibly even less. While trading this small may not make you rich, it can allow you to learn the ropes without putting a great deal of capital on the line.
- Extensive trading hours: The forex markets trade around the clock during the week and with so many different global players and inputs, there is always the potential for volatility and opportunity. Many new traders are working regular 9-to-5 day jobs, and the 24-hour trading action in forex allows one to trade in the early morning or at night. This may be advantageous at times. Japan, for example, may release some key economic data in the early evening that can drive market action and potentially provide trading opportunities.
- Low transaction costs: Unlike trading stocks or futures, you do not pay commissions when trading forex. Rather, you pay what is known as the pip spread. The pip spread is the spread between the bid price and the offer price. For example, the EUR/USD pair might be quoted as 1.1388/1.1391. This means you can sell EUR and buy USD at 1.1388, or buy EUR and sell USD at 1.1391. The actual market is slightly tighter, and forex dealers make their money by making a pip or couple of pips on every transaction through this spread.
Of course, you can lose money trading forex just as you have the potential of making it. With a low barrier to entry, around the clock trading during the week and relatively low transaction costs compared to other markets, the forex market can be a good choice for new traders or traders with limited time during the day to trade.