Forex, or foreign exchange, is the world’s largest financial market, attracting millions of individual traders, financial companies, banks, and governments alike. However, in addition to being a market for currency exchange and global trade, Forex offers an alternative asset class, allowing investors to diversify their portfolios.
In this guide, we look at Forex as an alternative asset class, the implications of such a use case, and some of its possible ramifications.
Trade Forex and Crypto with Ease
-
Trade 68 Forex and 8 cryptocurrency pairs
-
Enjoy no minimum deposits and no deposit fees
-
Explore 2,000+ indicators and develop your own trading strategy
-
Over 20 years of experience and insight in the market
OANDA Corporation is regulated by the CFTC/NFA. OANDA is a member Firm of the NFA (Member ID: 0325821). CFDs are not available to residents in the United States.
OANDA CORPORATION IS A MEMBER OF NFA AND IS SUBJECT TO NFA'S REGULATORY OVERSIGHT AND EXAMINATIONS. HOWEVER, YOU SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY OVER UNDERLYING OR SPOT VIRTUAL CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR MARKETS
Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses. OANDA Corporation is not party to any transactions in digital assets and does not custody digital assets on your behalf. All digital asset transactions occur on the Paxos Trust Company exchange. Any positions in digital assets are custodied solely with Paxos and held in an account in your name outside of OANDA Corporation. Digital assets held with Paxos are not protected by SIPC. Paxos is not an NFA member and is not subject to the NFA’s regulatory oversight and examinations.
Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and may not be suitable for everyone. We advise you to carefully consider whether trading is appropriate for you in light of your personal circumstances. You may lose more than you invest. Information on this website is general in nature. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. Trading through an online platform carries additional risks.
What is Forex?
Definition
Forex trading is done over-the-counter (OTC), that is, through a global network of banks and financial institutions serving as intermediaries. Unlike, for example, the stock market, Forex is open 24 hours a day, five days a week, allowing traders worldwide to participate in trading at almost any time.
What is an alternative asset?
Definition
Some of these assets, like precious metals, have a long history, and others, such as cryptocurrencies and Forex, are new.. What brings them all together, however, is their high liquidity and independence from the traditional asset classes.
In other words, by combining various assets and allocating their resources across them, traders and investors can stay immune to adverse movements in the market. To give an example, the price of gold usually goes up as the value of the dollar goes down, so those who have invested some of their funds into the precious metal can use it as a “safe haven” when currency values start to fluctuate.
Why trade Forex
There are four main reasons why Forex is a good alternative asset:
- Diversification;
- Hedging;
- Accessibility and liquidity.
Diversification
Diversification is a simple investment strategy that entails spreading one’s investments across a variety of different asset classes. By allocating all of your resources into one or two asset classes, your chances of profit will depend solely on the performance of those assets, which is rather risky. Instead, investors spread their resources across a larger number of assets to ensure at least a portion of their portfolio is immune to potential market fluctuations.
The main appeal of Forex as an alternative asset class rests on its low correlation with more traditional assets such as stocks and bonds. In other words, some currency prices will typically remain stable even if the value of your other assets starts to fluctuate. That means Forex can be a sort of safe haven in times of economic turbulence and mitigate potential losses.
Hedging
Hedging is a risk management strategy that can help traders stay protected from unfavorable currency price movements. If a trader or a company is conducting business with another party, let’s say in a USD/JPY pair, and they can initiate a position in another currency pair, let’s say USD/EUR, they can mitigate potential risks and ensure they stay protected in case the exchange rates take an adverse turn later. This is no different than using any other asset as a hedge.
Naturally, if the exchange rates take a positive turn, any potential extra profits will be lost. That means that hedging is not a way to make a profit but to minimize losses.
Accessibility and liquidity
Portfolio diversification with Forex is easy, as the market is accessible to a wide range of participants, from individual retail traders to central banks and governments. Nowadays, various online brokerages and trading platforms, such as OANDA, provide traders with easy access to the market and allow them to open positions with small sums and trade with high leverages.
Furthermore, the Forex market is open 24 hours, five days a week, with a daily trading volume of around $6.5 trillion. That means traders worldwide can access and analyze the market at their own convenience. This leads to high liquidity, meaning there are always new trading opportunities in a decentralized but regulated environment, which is not always the case with something like stocks.
Note
Trade Forex and Crypto with Ease
-
Trade 68 Forex and 8 cryptocurrency pairs
-
Enjoy no minimum deposits and no deposit fees
-
Explore 2,000+ indicators and develop your own trading strategy
-
Over 20 years of experience and insight in the market
OANDA Corporation is regulated by the CFTC/NFA. OANDA is a member Firm of the NFA (Member ID: 0325821). CFDs are not available to residents in the United States.
OANDA CORPORATION IS A MEMBER OF NFA AND IS SUBJECT TO NFA'S REGULATORY OVERSIGHT AND EXAMINATIONS. HOWEVER, YOU SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY OVER UNDERLYING OR SPOT VIRTUAL CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR MARKETS
Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses. OANDA Corporation is not party to any transactions in digital assets and does not custody digital assets on your behalf. All digital asset transactions occur on the Paxos Trust Company exchange. Any positions in digital assets are custodied solely with Paxos and held in an account in your name outside of OANDA Corporation. Digital assets held with Paxos are not protected by SIPC. Paxos is not an NFA member and is not subject to the NFA’s regulatory oversight and examinations.
Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and may not be suitable for everyone. We advise you to carefully consider whether trading is appropriate for you in light of your personal circumstances. You may lose more than you invest. Information on this website is general in nature. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. Trading through an online platform carries additional risks.
Is Forex a safe alternative asset?
No investment is completely safe. However, alternative asset classes such as Forex are considered a relatively solid addition to most traders’ portfolios, provided you approach it with the right mindset and have done the necessary research.
The Forex market can be rather volatile. While that might increase the chances of profit, it can also increase the chances of loss. In theory, all currency pairs can be subject to many factors outside the trader’s control, such as geopolitical events, unexpected bank policies, inflation, etc.
In addition, many Forex brokers give their users a chance to trade with high leverage. That is, they allow them to enter trading positions with borrowed funds exceeding the amount of the capital in their account. High leverages can lead to great profits, but they can also result in exponential losses.
Finally, the Forex market is decentralized and operates globally via four main sessions located in New York, London, Tokyo, and Sydney. All transactions are done over the counter, between participants in the market, with no intermediaries, such as banks and financial institutions. That might seem attractive, but rules and regulations may vary depending on your location, so it is always essential that you trade and invest with a regulated and trusted broker.
Pros and cons of Forex as an alternative asset class
Pros
- It is accessible thanks to a large number of regulated online brokers;
- High leverage;
- High liquidity;
- The Forex market is decentralized and thus not subject to control by one body;
- Available 24 hours a day, five days a week;
- Great portfolio diversification;
- Fantastic hedge.
Cons
- The Forex market can be highly volatile;
- Decentralization implies lighter regulations in fix this parts of the world;
- It might be harder for newcomers to trade against seasoned participants in the market.
Final thoughts
Forex as an alternative asset offers traders a lot of opportunities, but it comes with some inherent risks that must be taken into account before any trade can be initiated.
As an alternative asset, Forex is best used for portfolio diversification, as it is independent of more traditional assets, but it is by no means a guaranteed solution, as the financial market can be highly volatile and outside the investor’s control if affected by something like geopolitical events.
When investing in Forex, it is essential that you do enough research and continue to monitor the market. Only with enough knowledge and discipline can your investments be fruitful, especially if you are new to the game.
And lastly, only use trusted brokers as well as set realistic expectations. Some ways of Forex as an asset, such as hedging, are to manage risk rather than generate profit. Treating Forex as a sure way to wealth will only lead to financial consequences.
