Why trade Forex instead of other markets?
Sure, it holds plenty of advantages over stocks, bonds, and maybe even cryptocurrencies, but it's a tricky market to figure out.
This post will tackle some of the reasons why traders still choose to deal with currencies and the benefits of doing so.
Top 5 Advantages Of The Forex Market
In the Forex industry, it is a well-known fact that the volume of currencies changing hands every day reaches $5 trillion.
That massive volume is an advantage for traders because of the liquidity it provides them.
And what liquidity does is it allows traders to go in and out of trades instantly -- in a matter of seconds!
Traders don't have to worry about unprocessed orders because the price is either too high or too low.
That immense amount of currencies traded each day ensures that there are enough buyers and sellers to accept trades at any price.
Another advantage of the foreign exchange market is that the trading hours are not limited to a few hours a day.
Forex traders have the whole 24 hours to buy and sell currencies for five days.
This means that those who have full-time jobs can trade after work, and it doesn't even matter what their shift is because as long as there are a few extra hours a day, they can pull up their laptops or mobile phones and start trading.
Holidays aren't even a problem for those who have a trading itch they want to scratch since the Forex market is open even during major holidays.
Leverage and Margin
Leverage is perhaps one of the reasons traders flock to the currency market because it lowers the barrier to entry.
Through leverage, traders can put just a fraction of the actual position size they wish to enter and reap the rewards of the actual trade size.
For example, a trader wants to control a trade size of $100,000, and the leverage the broker provides is 1:100.
This means that the trader needs to put down only $1,000 (which is also called the margin), and the broker will supply the "borrowed" capital (leverage) to trade the $100,000.
The effect is that the earnings of the $1,000 are magnified. Instead of earning a $10 profit, the trader earns 100x more or $1,000.
However, leverage, as a lot of traders say, is a double-edged sword, so it can also work against the trader -- that $1,000 profit could also be a $1,000 loss!
Low Transaction Fees
Aside from the opportunity to make money in a market that is fully awake for five days a week, the transaction costs that traders incur from their positions aren't that high too.
Brokers don't usually charge traders with a commission, unlike in stocks where some online stock brokers would charge a fee that's as high as $50 per trade.
Forex brokers are different wherein traders only pay the difference between the BUY and SELL price of a currency pair, and that's usually a difference of only a few pips.
Support and Learning
There are also a number of free resources, educational materials and tools found online or supplied by brokers that are designed to help new traders or even savvier ones perfect their trading.
Also, the availability of trading software, whether it'd be demo accounts or an application dedicated for backtesting, makes it easy for traders to master the currency market.
Top 3 Disadvantages Of Trading The Forex Market
Now, it's pretty clear what the advantages of Forex are at least over other markets, but what about its disadvantages?
Difficult to make money
Forex trading is a zero-sum game, which means that a trader has to outsmart and outperform other market participants (who are possibly more informed, more equipped and more resourced than the average retail trader) to make a profit in the market.
And, that's not an easy thing to do.
The majority of traders lose money in trading currencies, and one could point to several reasons, but the two common ones are the use of high leverage and impaired trading psychology.
Another disadvantage of the Forex market comes from the risks associated with it.
There are, of course, more than one kind, but perhaps what retail traders should be concerned about the most is the exchange rate risk.
Needless to say, the value of currencies fluctuates against one another, and there's no limit to that.
Once a country's fundamentals plummet or undergo a drastic change, its currency could either skyrocket or go in a free fall.
That's bad news for those who don't practice proper risk and trade management.
Price volatility can be slow during the day or could be at breakneck speed, so there's no telling what can happen.
One particular case of this occurred in early 2015 when the franc was unpegged from the Euro, and within minutes the Swiss currency shot up to 20%.
Those without stop-loss orders were wiped out of the market altogether.
Some even incurred debt due to the high leverage they took out from their broker.
Severely affects a trader's mental makeup
Finally, due to the risk, volatility and other factors that make the Forex market difficult to trade affects a person's mental makeup, which is another disadvantage of trading currencies.
If traders aren't well-prepared mentally to take on the challenge, they may fail in one fell swoop.
When greed overpowers the ability to make prudent decisions, that's going to reflect on how traders use leverage (usually inordinately high) or the number of trades they take (usually insanely plenty), which both can be symptoms of an account going down the toilet.
It's not just about controlling the greed aspect though, but it's also about making deliberate decisions.
Some traders have a hasty approach, firing off trades without proper position size calculations, entry and exit strategies, etc.
Trades absent of careful strategizing will render reactive responses from the trader, which not a lot of trader types or trader personalities can thrive in.
Minimum Deposit: $50
Spread (EUR/USD): 1.1 with Standard Account
Regulation: FCA, CFTC, FSA, IIROC
BROKER: CITY INDEX
Minimum Deposit: £100
Spread (EUR/USD): 0.69 with Standard Account
Regulation: FCA, ASIC, MAS
So, those are the advantages and disadvantages of Forex trading. If there is something we missed out, let us know from the comments below!
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