With the recent popularity of Forex trading, many investors wonder why Forex is the way to go. Here are a few reasons which answer this question.
Why Forex? One of the reasons why people trade Forex is diversification. Just as every competent investor needs to diversify by asset classes and sectors, so too they need exposure to assets in multiple currencies and an understanding of Forex trends and what drives them.
Why Forex? Certain currencies tend to move with certain commodity prices. Having commodities exposure is a means of hedging this currency risk and playing Forex trends, so both Forex brokers and traders typically also deal with commodities. Thus while they are different asset classes, in practice Forex tends to include commodity trading and investing.
Why Forex? Forex has higher risk-adjusted returns. Forex is among the most rewarding asset classes for traders and investors. Although Forex has a reputation of being for short-term, high-risk speculators, there are trading styles suitable for both short term and long term traders:
More conservative active traders use longer-term holding periods and specific methods and instruments to reduce risk.
Long-term investors know how to:
Ride stable, proven, long-term Forex trends for capital gains.
Earn steady income from different kinds of currency trades or from investing in bonds, dividend stocks, and other income vehicles.
For those willing and able to handle more risk, and understand why Forex has become so easily implemented, the availability of leverage, or borrowed funds to control large blocks of currencies allows greater gains and losses. Using leverage creates unmatched profit potential for those with limited trading capital only if they learn how to control the downside risk. For example, with 100:1 leverage, a 1 percent move means 100 percent profit. It also means 100 percent loss. If not for this ability, why trade Forex?
If you know how to manage the risk of high leverage, you can grow your principal with leverage far faster than in other markets. And that is why Forex has taken center stage to all other investment vehicles.
Why Forex? A Forex trader can profit just as easily in a falling market as in a rising one.
During times when markets are in strong downtrends and the easiest profits and least risky trades come by betting that stocks or commodities will go down in price, regulators will impose restrictions that make betting on downtrends harder or impossible. Stock markets will see uptick rules or outright bans on short selling. Commodity markets will raise margin requirements so that such trades are more expensive and less profitable.
That can’t happen in Forex markets. In every single trade, we’re buying one currency and selling another, so it’s impossible to ban selling (or buying) of certain currencies without shutting down the entire Forex market. We’ll explain this in greater depth later. For now, just know that in Forex it doesn’t matter if markets are rising or falling. There are always ways to profit regardless of the trend.
If you’re heavily exposed to a certain kind of asset, you can hedge that position with a currency trade designed to move in the opposite direction.
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