Tue. Oct 20th, 2020
why should you trade forex

Why Trade Forex? -Advantages And Disadvantages Of The World’s Largest Market

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


Liquidity

forex liquidity

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.

Trading Hours

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

forex leverage

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.

Risk

forex risk

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

greedy traders

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.


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So, those are the advantages and disadvantages of Forex trading. If there is something we missed out, let us know from the comments below!

You can also try to take the quiz below to see if you learned something from this article.



11 thoughts on “Why Trade Forex? -Advantages And Disadvantages Of The World’s Largest Market

  1. Hey thank you for the awesome review over Forex!  I like the idea of trading Forex, and I believe that if done right, there is money to be made.  I know that you put risk on the disadvantage, but I would actually put it on the advantage.  There is risk involved, but if you can manage the risk properly, I think it would be a great investment.

  2. The writing is very beautiful and very balanced between the portion of advantage and disadavantage. I agree with everything you write that is liquidity, margin, leverage, to severely affect a trader’s mentality.

    Back to 10 years ago, I had felt a failure when trading forex. Where all my savings are gone in the market. However, that was 10 years ago, where I practiced forex trading just like gambling (put 10 positions, put TP 20 pips, SL 10 pips). The result? I lost everything and was hit by a margin call. Lol

    However, after that incident, I studied and learned to understand fundamental analysis (how to read news and effects on the market) and do technical analysis. The result is that every month I can generate an average profit of 20 percent of the capital I have.

    I can trade whenever I want. I also do not need to see the market too often, charts and so on.

    So the point is trading for living is true! However, all that must be coupled with the investment of your head first.

    All the best!

    1. Hi Asmadi,

      What you said is on point. Investing in your knowledge is the first thing anyone should do.

      Thanks for commenting.

  3. Thanks for the info very easy to follow! To many times i have to leave these types of articles due to not understanding moat of what is being said! That makes it hard on a man like me who wants to learn to invest and play the stocks. 

    Do you think this would be something a beginning investor such as myself should go into? Or should i wait until i have more experience in this realm? Thank you in advance!

  4. i got into forex trading some years ago and trust me it did not start well. i made so many losses to the point i gave up. even after the use of indicators and changing platforms. but as time went on i began to learn little procedures and how to predict the market. it is really risky

    1. Hi Benny,

      Thanks for sharing your experience.

      Well, nothing comes without any risk and the inability to perceive that is an investor’s greatest failure.

  5. I have never been involved in forex trading but I have a fairly good idea of what it is about because my brother used to trade mostly after work and on weekends. I am mostly involved in trading stocks. The good things about these activities is that you open yourself to opportunities to really make some good money. It requires keeping abreast of trends and movements and you have to have a high risk tolerance to survive. I agree with your point that you have to be careful in making the decisions to act( or don’t act) or else one single wrong move can wipe you out. Thanks for this article. Maybe one day I will get involved.

  6. $5 trillion per day is definitely a brow-raising number and that sort of liquidity is quite appealing. Though not an active trader currently, I have worked in the industry and can say that it can make for an engaging career. I was just looking at the Euro this morning actually and thought it’s pretty wild how it’s nearing the dollar. I like how you pointed out that trading foreign markets can be done 24 hours a day, which is definitely an advantage over other asset classes, though hopefully doesn’t make one too manic hah. On the other side, though, there are downsides by way of risk and difficulty. These are excellent points and things to consider, especially for someone who might be thinking about getting into Forex trading, great post!

  7. Thank you so much for sharing such an excellent article with us. Your article was interesting and informative. I have got a lot of information about Trade Forex. I like the idea of forex trading and I believe that if done right, I can make money. But I have to invest very carefully here and if I invest very carefully I can succeed here. I have enjoyed reading your article and found this valuable information. I will share your article with my friends so that my friends can benefit from reading this article and getting this valuable information. I have bookmarked your website so that I can come back to your website later. I thank you again for providing such a beautiful post.

  8. Hi! Thank you for outlining the disadvantages of trading Forex. I know that most of us just collapse when we’re pressured in the middle of a trade. And this is particularly true for forex. I have my concerns about starting with Forex but at least I have all these elements in mind. I have had some success in other markets and it has made me dream with forex. But now I’m concerned.

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