Discussion Topic: Pros & Cons of Forex Trading
We already have dedicated articles on Advantages of Forex Trading and Disadvantages of Forex Trading. But later we thought that you may not have long time to spend on two articles, so we decided to write it short. This article describes The Pros and Cons of Currency Trading (i.e. - Pros and Cons of Forex Trading) - The Good and The Bad.
Currency Trading - The Basics:
Forex Market, which is open 24 hours a day and five days a week, is the world’s most liquid and most traded financial market.
Here you have a choice of either trading in the currency futures market, which is controlled by physical exchange, or the forex “spot” market, where you trade over the counter with help of a broker.
Currencies are always traded in pairs, which mean you can buy one currency by selling the other. For example, If you sell the pound against the dollar (GBP/USD), you actually short (sell) the pound but at the same time long (buy) the dollar.
If you are new to forex trading, it is recommended to start off with a major pairs or crosses that are highly liquid pairs, like the EUR/USD or GBP/USD or USD/JPY.
Currencies move up and down by pip (percentage in points), which is measured as one-hundredth of one percentage point. When trading a dollar-based currency, one pip equals $10 for standard Lot.
The Pros and Cons of Forex Trading (Currency Trading):
Here we are listing some of the most powerful pros and cons of forex trading (i.e- pros and cons of Currency Trading).
The Pros of Forex Currency Trading
- In the Spot market, usually, there is no clearing fees, no exchange fees, minimum government taxes, no brokerage fees, and no commissions.
- Retail Forex brokers make their profits only from the Bid/Ask Spread, and sometimes with swap chargers.
- Spot currency trading eliminates the requirement of middlemen, hence allowing you to trade directly with the market that decides the pricing of a specific currency pair.
No Fixed Lot Size:
- If you are not trading in future or options, in spot currency market there is no fixed lot size for trading.
- Usually, brokers provide the option to buy in multiple lot sizes, like standard lot, mini lot, micro lot, or even some brokers allow purchasing in nano lots.
Low Transaction Costs:
- The retail transaction cost in forex trading, the bid/ask spread, is usually less than 0.1%. At larger dealers, it could even be as lower as 0.07%.
24 Hour Market:
- From the Monday morning opening of Australian session to the afternoon close of New York session, the forex market is always open.
- So you may trade on a part-time basis and can choose your own time for currency trading.
No One Can Corner the Market:
- The size of foreign exchange market is approximately 5.1 trillion dollars and has a large number of participants. So it’s obvious that no single entity can control the market price for a prolonged period of time.
Use of Leverage:
- Forex brokers provide leverage to traders to trade in the currency market, which gives the freedom to trade more money on the market than what is available in the trading account.
- Leverage gives you the opportunity to make higher profits, and alongside keep risk capital to a minimum.
- For example, a forex broker may offer 20-to-1 leverage, which means that a $250 dollar margin deposit would enable a trader to buy or sell $5000 worth of currencies.
Very High Liquidity:
- The currency market is extremely liquid in nature. That means, under the normal market condition you can buy and sell currencies instantly and as and when required.
- This means you can place large orders, and that would be executed without much affecting the currency exchange price. You are not likely to “stuck” in any trade.
Low Capital Requirement:
- Entering into the forex trading much easy as it needs much lower capital than stocks trading or future/options trading.
- Aside from standard account, many online currency brokers offer “mini” and “micro” accounts, and usually require $25 or $50 as a minimum deposit.
Profit Potential from both Rising and Falling Market:
- The Best part of currency market is that it has no restrictions on directional trading. That also means, if you think a currency pair is going to increase in value, you can buy it.
- Likewise, if you think it is going to decrease in value, you can sell it. In either case, if your trade goes in favor, you make Profit.
Free Stuff Available Everywhere:
- The most favorable part of currency trading is the availability of free tools and learning material, which you can use before trading live.
- Majority of online forex brokers offer free “demo” accounts for practicing and building your trading skills. They also deliver real-time forex news and charting services for free.
- You also don’t have to worry about learning the trading strategies and philosophies as we have started this FinanceOrigin website to provide you free learning.
The Cons of Forex Currency Trading
- Due to the decentralized and de-regularized nature of the forex trading market, it is entirely dominated by brokers. As being broker-driven, the forex market might not be fully transparent.
- You may not get the best price every time or may get limited views on trading quotes as furnished by your currency broker. So a simple advice is to deal only with regulated brokers who fall within the purview of well-reputed regulators.
Price Determination Process:
- The process of price determination of foreign currency exchange is believed to be very complex because of the composite price determination process.
- The rates are influenced and influenced by multiple reasons and factors, including global politics and global economy. Which makes the currency trading a difficult choice, and you must not trade only on the basis of technical analysis and indicators.
No Centralized Exchange:
- Unlike the stocks or futures, the spot Forex market does not have any centralized exchange. Here each of the brokers acts as its own exchange and the broker effectively becomes the market maker.
- This provides an opportunity for them to abuse the system, and we generally also witness price variations from broker to broker.
Self-Directed Learning Curve:
- Even if there is an advantage of getting many learning tools and materials available at no costs, it also possesses a risk.
- A disciplined and continual self-directed learning is quite essential throughout the trading career.
- More than 90% of beginners quit currency trading during the initial stage, only because of high loss-making due to limited forex trading knowledge and inappropriate trading.
High Leverage means High Risk:
- Currency trading is known for high leverage, meaning you can multifold your profit/loss exposure against your original trading capital.
- Forex brokers allow leverage of as high as 200:1 depending on the country, so you need to have only $1 to take a trading position worth $200. So while a trader can make profits from the leverage, his risks of loss-making are also maximized.
- Thus currency trading can easily become a loss-making nightmare unless the trader takes calculated risks.
High Volatility of Market:
- The high volatility of the forex trading market can either be an advantage or a disadvantage.
- The change in the global policies and economy may sometimes drastically change the forecast and makes it very difficult for the traders to judge the market.
- This may cause a huge loss to the traders if the market suddenly goes downside and there is no stop loss placed.
- The free exchange of information on the internet and social platform makes it easy to look up to the market condition and invest without any deep analysis.
- But the risk of such social trading is that you might wrongly follow an inexperienced trader and face a decent amount of loss over time.
Interest Rate Risks:
- Variations in interest rates of a country have a major effect on currency exchange rates.
- If a country’s interest rates rise, the currency also strengthens due to an increased inflow of investments in that country’s banks.
- Likewise, if interest rates fall, the currency will weaken as investors would start to withdraw their fixed investments.
Risk from Scammers:
- A major disadvantage of forex trading is that there are a lot of scammers who are just waiting to draw the money from the investor. So you have to be extra careful while choosing a broker.
- When considering the options to invest in currencies, you must thoroughly evaluate the structure and stability of the currency issuing country.
- In numerous developing countries, currency exchange rates are fixed to a leading currency such as the USD. In this condition, the country’s central bank must maintain adequate reserve; otherwise, any deficiency in currency reserve may have adverse effects on forex prices.
- To avoid this problem you should only trade in major pairs or major crosses.
The Foreign currency trading has both pros and cons, and this is normal as everything on this earth has its own pros and cons.
The only thing you must take care of is that, while trading in forex market you must take each and every step very carefully. You must take the full advantage of the pros and minimize the effects of the cons.
We hope that you have enjoyed the above article summarizing the Pros and Cons of Forex Currency Trading. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments, and let us know what you think about the pros and the cons of currency trading or forex trading.