Just like any other trading activity, forex trading also has both favorable and unfavorable characteristics for any forex trader. Thus, individuals wishing to enter the forex market must weigh its advantages and disadvantages to determine if it is a lucrative and suitable market for their needs.
Pros of Forex Trading
It is a known fact that trading forex has some risk attached to it; however, the foreign exchange market has proved beneficial for many traders. Many consider trading forex a profitable and attractive opportunity. The benefits of trading forex are as follows:
- Accessibility: The forex market is one of the most accessible markets for traders. It allows traders to open a forex account within a period of a maximum of three days. Additionally, the traders can begin trading with a very nominal amount. Nowadays, forex trading can also be done online; therefore, irrespective of where you live, you can buy or sell trading assets from any corner of the world using your smartphones or laptops. They can access real-time pricing, charts and news using online trading platforms. Furthermore, the forex market is available 24*7, enabling traders to fit trading according to their schedules.
- Leverage: The best thing about forex trading is that the leverage is higher in the forex market than in any other market. A forex broker can offer you leverage as high as 2000:1, which has the potential to magnify your profits considerably.
- Liquidity: The forex market, by far, is the most liquid market, enticing many traders globally. Additionally, it is the largest market where trading is done in large volumes. This makes it easier for traders to sell the assets as and when they wish to.
- Fewer Fees and Commissions: Forex trading costs are often determined by the difference between the buying and selling prices the forex brokers disclose in real-time. Unlike equity trading, which is subjected to hefty commissions and hidden fees, forex trading is free from such costs. Hence, the entire process is transparent and fair.
Cons of Forex Trading
Although there are numerous reasons you should trade forex, sometimes, traders have to face the adverse effects. Here are several cons you must get familiar with before jumping into the foreign exchange market.
- Volatility: Like any other market, the forex market also shows volatility at some point. However, it negatively impacts traders who hope for short-term profits but get exposed to extreme volatility, making their trading strategies unprofitable for them.
- Small Traders Are at a Disadvantage: In the forex market, the bulk of forex trading is done by prominent market players such as hedge funds, banks, and financial institutions. Due to the access to better technology and other resources, they have the advantage of influencing price movements in the market. This is a disadvantage for small traders who often find it hard to stay abreast of the fast-moving market conditions to ensure their trades turn out profitable.
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- No Centralized Exchange: One of the biggest drawbacks of the forex market is the absence of a central exchange which limits regulatory oversight. This makes it compulsory for a trader to diligently check the broker’s reputation and trading practices before signing up for a trading account. Also, based on the country the brokers operate in, sometimes it is hard for the trader to file a complaint if the broker has mistreated him.
Also read: Common Trading Mistakes and How To Avoid Them
Forex trading is an accessible, flexible and lucrative activity where transparency is maintained. Considering certain risks attached to forex trading can offer a wide range of opportunities to traders willing to earn significant profits.