Due to the many benefits the Foreign Exchange Market provides, it has become the most largest and successful trading market in the world. Many traders turn to Forex when interested in trading currencies as it promises and proves to offer a comfortable and profitable trading career. However, similarly to any other market, the Forex industry encompasses some disadvantages as well. Nevertheless, it does not prevent a trader from considering trading in the FX market; usually the traders that are uneducated are the ones who receive losses during their trading, and he/she will decide to leave or not enter the Forex market. This emphasises how complex but at the same time how beneficial the Foreign Exchange market is. Forex trading participants are increasing everyday whether they are from an Interbank, a commercial company, private speculators or non-financial companies.
Forex trading is all about building profits as well as managing your losses effectively. A beginner trader will need to understand and absorb the many advantages and disadvantages the Forex market offers so as to gain the benefits during his/her trading activities and to avoid as many of the negatives as possible.
Advantages of the Forex Market
The Forex market is decentralised and operates 24 hours a day from Monday to Friday. Traders have the access to buy and sell currencies any time of the day they desire. The chances of an overnight gap occurring is inevitable. Every trader has the prospect of trading even considering that some trading markets are closed. This is an advantage for investors that want to trade out of their usual business hours. Trading with Forex can be a hobby/career from home!
The Forex market is referred to as the most ‘liquid market in the world’. It is particularly largely liquidated for the most common currency pairs in the market. The Forex market has the ability to attract and take in several large operations; up to a recorded $1.8 trillion are traded daily in the Forex market. This is astonishing, especially looking from the point of view of a stock trader as the stock exchange market does not have such extreme possibilities and successes (The global FX market is 50 times bigger than the NY Stock Exchange). The extreme liquidity of the market gives traders the advantage to stop a position, limit one or open and close one whenever he/she wants to.
In stock trading, commissions and transaction fees are charged by the amount of service a broker offers the trader. For example, if the commission is charged at the lowest of $7.95 per trade, the client will have no admission to look at market details or to research and so on. However, if the trader was offered the commission of $100 (traditional brokers) he/she would have access to everything including research and market information. Moving on, this differs enormously to the Forex exchange market and the commissions and fees which are involved.
When trading with Forex, the only commission and transaction fee charged is the spread (the difference between the bid/ask price). This is an additional advantage of the Forex trading industry. There is no expense when a trader decides to enter/exit or limit a trading position.
The spreads offered in Forex trading are fairly similar to that of stock trading. The competitiveness of the Forex market however, means that the spread you are paying to a broker is of a much smaller percentage against your potential profits. The spread you pay to your broker is far easier to earn back in your trading as well.
In the Forex market, a trader can regain his trade rebates if he registers with an Introducing Broker. A trader can maximise his/her profits in the account by receiving trade rebates after every trade executed. This is a major advantage for a Forex account as it will prove to be increasing in profit regularly.
The Forex market is free from market manipulation. This benefit is due to the fact that traders have access to real time news and country, economic and currency analysis. Reports and regular updates about their account form a beneficial transparent market. The Forex market is protected from sudden unexpected situations allowing risks and profits to be continuously monitored.
The Forex market enables a trader leverage of up to 500:1. With the highest possible leverage, a trader can buy $500 into a currency pair with only $1 of his initial margin. In Forex, leverage can range from 2:1 to the exceeding 500:1 and a trader can use any amount whenever he/she desires. This can be an advantage for traders who only hold a small amount of capital. They can have the benefit of gaining huge profits with a very little capital needed.
Entering the Forex market only requires a small investment unlike other trading markets such as the stock exchange that demands a minimum of $25,000. Demanding such a small investment can make the trading experience quite affordable for most people and a very attractive alternative for those who can’t afford to invest elsewhere. Opening an account is made very simple as the lowest investment demanded is $100 at some brokers. Payment options to fund your account are vast in Forex trading; a trader can use a credit card, PayPal, bank wire and many other alternatives.
People that are new to the Forex market gain benefits from the small investment the market requires. Seen as it can be considerably ‘cheap’ to open an account with Forex, beginners can slowly learn to trade step by step. A beginner will become acquainted to the different strategies Forex trading requires such as how to set appropriate stop and limits in a position. This small investment can help a trader gain more skills and understanding of trading with Forex without losing a substantial investment.
Through any channel like the internet, a beginner trader can develop his knowledge and background of the Forex market. He/she can purchase free newsletters and reports, gain access to free charts, demo accounts, guidance on strategies, reference guides and even free mentor and consultants. Using a variety ways of learning is advisable before entering the Forex market. It has become very common for novice traders to seek online help and even professionals do so who want to gain further education about Forex trading.
Traders in the Forex market have the chance to make profit in any given market condition. The ability to trade in a bullish (rising) and bearish (falling) market gives Forex traders flexible trading opportunities. The world is suffering through the economic crisis at the moment and even in such a financial state a trader can execute trades in the Forex market.
Traders are given the chance to choose out of the continuous supply of market trends of currencies. They can decide upon long term or short term trading and there is the option of aggressive or conservative kinds of investments. Each trading strategy relates to each trader’s preferences.
Disadvantages of the Forex Market
As mentioned above, high leverage can acquire a trader huge potential in his/her trading career. However the potential of a loss is as equally possible. High leverage is a ‘double-edged sword’ as they say. Once a trader’s account is increasing, the margin will begin to decrease from 400:1 eventually down to 20:1. Each investor’s risk toleration depends on his/her choices of leverage. It is recommended to traders to be cautious of the size and risk of a trade, instead of the initial trade cost.
Each trader must have a financial objective and strategy when trading with Forex. Without such fundamental aspects a trader can suffer huge losses. He/she can lose exceeding amounts of funds and profits simply for not having experience and knowledge of the market. Traders must be certain their decision on their selected account leverage is ideal for their trading before leaping into trades without caution. Professional Forex traders are known not to choose the highest leveage as they believe it will eventually lead to higher level of loss, or loss in profits. It is important for a trader to consider this before opening a Forex account.
Forex demo accounts can fool a trader just as much as it can improve a trader’s techniques. A trader will not be fully financially literate when trading through a demo account. This is because a demo account does not involve loosing or gaining real money. The money used to trade in a demo account is simply ‘virtual money’. A real Forex environment involves real risk taking and it is vital that a trader learns this in order to control a professional trading career thereafter.
A trader needs dedication and time to trade Forex profitably. There are many aspects, theories and techniques to learn before entering the market, therefore a trader should do his/her homework. In FX Trading there will always be a winner and a loser. In order to be the winner, a trader must study and research and gain as much knowledge as possible. Even with hours upon hours of studying, there is always the chance of being the ‘loser’ in a forex trade.
It is critical that a trader is extremely cautious in choosing a broker. Every broker should encompass regulation, security, all the instruments needed to trade and a decent customer relationship alongside customer service. There are many companies that cheat people so a trader must read up and find out about each broker before deciding to settle with one.