Pros and Cons of Trading Forex
The Forex market has long been established, nonetheless with more brokers offering retails traders easy accessibility, growth opportunities still exist.
Trading Forex is a two-sided medal. It has its pros, and it has its cons which is very important to be aware of before you start trading.
In this article, we’ll cover both aspects to give you a deeper overview.
Pros of Trading Forex
Accessibility and availability
The Forex market is, without doubt, one of the most accessible for individuals. You can start your trading journey with a very small deposit and you can start trading within minutes. Forex traders enjoy market frequency as they run 24 hours 5 days a week. All you need to trade is a good internet connection, computer or mobile device which gives you access to a trading platform. Forex trading has no specific geography and can be done from anywhere, anytime.
Potential fast profits and big returns
One of the main draws of the Forex market that separates it from other financial instruments is leverage. Leverage, in a nutshell, allows traders to take larger positions than the value of their account. For example in Forex trading, if you have $1,000 in our capital, and a broker offers you 100:1 leverage, you can open positions with a value of $100,000 (and some brokers will offer you even more).
The broker will be facilitating these positions by leveraging your trades, essentially “lending” you the capital. Once the trade has been placed and once the position is closed, the “borrowed” money returns to the broker and you remain with the profit.
Leverage simply allows retail traders to access markets they wouldn’t have been able to otherwise trade without significant capital. It is also important to mention that leverage is a double-edged sword, and as sweet it can be if used without wisdom – can be very bitter. So, before you jump on the opportunity and leverage your money, you better arm yourself with a firm education on the subject.
Volumes and liquidity
Forex is the largest financial market. Biggest in the number of participants and biggest in liquidity. That means that even very large orders can be filled and executed without any problem. There are always buyers and sellers. This reduces the possibilities of price manipulation by any of the market players.
It’s NOT a science!
Forex is traded in pairs of currencies. It is always one currency versus another. For example – EUR vs. US Dollar, or the US Dollar vs. JPY (Japanese Yen). It means that when you buy a currency you sell the other and when you sell a currency you buy the other one.
Despite what many beginners think, Forex trading isn’t hard and can be done successfully by anyone!
Trading isn’t as easy as click buy and sell and generate unlimited profits, however, it is not rocket science. There are skills you have to learn, there is the knowledge that must be gained. You have to understand the forces that take part in the market and you have to understand the “nature” of price movement. Essentially this is the “Golden-Key” to a successful Forex trading career. Education.
Low Commissions and Costs
With any large marketplace, you will have numerous participants operating similar functions. In Forex you have many brokers, liquidity providers and banks all involved and targeting similar clients. This competition means in order to remain competitive, each offer low rates.
The main cost in Forex trading is the spread (the difference between buy bid and sell ask price) that the broker charges in any transaction. The swap (an overnight interest fee that is either paid or charged to you at the end of each trading day) and fixed commissions (normally charged by brokers that offer little to no spreads).
Compared to any other financial market, the costs in Forex are extremely low and enable greater accessibility.
The fact that Forex is a 24/5 a week market allows traders to participate at their own comfort, irrespective of time or location. Whether based in Australia or Canada, Europe or Africa a trader will have the ability to find trading opportunities without market or time restrictions. Forex trading can fit perfectly around those who want to use this as a vehicle to a secondary income and also those who want to be full-time day traders (looking for frequent, low volume opportunities).
Safe trading market
Although risks are involved with any financial market, Forex is among the safer markets and there are several reasons for that.
In comparing this to say stocks, Forex is traded in pairs. The currency of one nation vs. another nation. (e.g. EUR/USD). Whilst with stocks, the price is based on the value of the company. Meaning if the company goes bust, an investor would be at risk of losing their entire investment. Whereas a currency trader can profit regardless of the market rises or falls.
Cons of Trading Forex
A market that never sleeps
While there are advantages to the Forex market trading 24 hours a day 5 days a week, it can also come with its disadvantages. The fact that there is constant activity, means it’s easy for some traders “hungry” for new opportunities to make ill advised decisions and find themselves exposed to bad trades. With the correct education and experience, most traders know how to manage their frequency of trading, which can be problematic for new traders.
As the forex market continues to grow in popularity with those seeking an income, there has been a rise of “fake gurus”. These are traders that claim to have the “best strategies” or the “holy grail of Forex trading”.
This fake belief is what they sell to retail traders (normally beginners) and provide them with poor education that makes them lose money, and believe “trading isn’t for them.” The good news is that there are also high-quality educators who provide helpful material and anyone with the right commitment can learn the right way.
Traders rely on rapid price change or volatility. The bigger the movements, the bigger the possibility to make larger gains. Lack of price change makes traders disillusioned and at risk of trading just for the sake of it, even if there isn’t the volatility that creates true trading opportunities.
If a trader buys USDJPY at 105 and after a month the price is still 105, it doesn’t matter how talented, clever or knowledgeable the trader is, they would not have made money.
Even though such “dry” periods aren’t too common, they still happen in periods and can be hard to deal with for many traders. Education on such subjects can help traders identify such periods and avoid getting involved in those markets which will provide nothing but stress.
While there are more pros than cons to trading the Forex market, it’s always wise to have an overview of both. The potential to profit does exist and there are many good and profitable traders around, the hard part is identifying who they are.
The key is to educate yourself.
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