Pros and Cons of Trading in Forex
Is Forex Trading the sheer size or the immense money that can be potentially made? Is it the high leverage or around-the-clock trading opportunities? Whichever it is, there is no gainsaying that the Foreign exchange (Forex) market is attractive. However, Forex Trading is not without its cons, too. Moreover, interestingly, it might be noteworthy to you that some of its pros are also its cons.
So before start trading, you should read the Pros and Cons of Forex Trading and then create your trade plan according to your investment choice.
Pros of Forex Trading
Around-the-clock Trading Opportunities
The Forex market is on 24 hours every day. In fact, when you are down, sleeping, the market is up, running. As the Asian session closes, the European session takes over. The North American course follows, also. This nature of the market ensures that there are always opportunities to trade.
Moreover, the around-the-clock opening of the market gives you flexibility in creating your successful trading goals. Do you have a day job? Do not worry. You can trade in the evening. Do you work at night? Do not be disturbed. The Forex market is still yours; you can trade in the morning or the afternoon or evening!
As long as you have a laptop or a phone, you can trade in the Forex market anytime you wish. However, as you will find out later, this is also a con.
The Forex Trading market provides traders the opportunity to leverage. This means that Forex traders can control accounts that are far larger than their trading capital. Leveraging simply means borrowing. When Forex traders use leverage, they borrow from their brokers. As a result, with leverage, a trader with $1000, for instance, may be able to control up to $10,000. Leverage makes possible for Forex traders the potential for the immense profitability that Forex trading is popular for. Also, for the most part, leverage is one of the reasons for the low entry barrier into Forex.
Forex trading is scalable. You can choose to set your Forex Trading Strategies according to your specific preferences. And still, your opportunity to profit will not be hampered. One of those settings you can make is your choice of account type.
Generally, Forex Brokers offer three types of accounts to their clients. They are the standard, mini, and micro accounts. The difference between them has to do with the deposit requirements and profit-making potential of each. For instance, you trade standard lot sizes on a standard account. Also, a mini account enables you to trade mini lot sizes. Likewise, you trade a micro lot size on a micro account.
A standard lot for a currency pair consists of 100,000 units of the base currency. Forex traders technically measure profits and losses in pips. For a U.S dollar-denominated standard-lot account, one pip equals $10.
However, for a mini-lot size, which is one-tenth of a standard-lot size (10,000 units), one pip is $1. A micro-lot size account is made up of 1000 units of the base currency. On it, one pip is equivalent to just $0.1. This idea of lot size makes Forex scalable. Also, it can also serve as a risk-managing tool.
Compared to other financial markets, the Forex market is relatively less pricey. While stockbrokers charge percentage-based commissions on each trade, most Forex brokers do not charge commissions on trades. Instead, they earn their compensations through the spread. Spread is the difference between the asking price and the bid price.
However, Forex charges are dependent on other specific factors. They include the size of trades, broker, currency pair, and the time of the day. Nevertheless, they are usually relatively insignificant.
For instance, scalping aims to take small pips off each small-sized trade in a short time. Hence, it usually attracts unfavorable spreads.
Free Trading Software and Research Tools
Most Forex brokers provide trading software for free. In addition to their in-house trading platforms, there is also the complementary industry-standard MetaTrader 4 platform. Most of those platforms are easy to use and they provide a broad range of useful research and analysis tools. Largely, they support tens of currency pairs and other financial instruments. Also, they make provisions for customization and the use of technical indicators. On most, you can make use of different charting patterns, real-time economic news, and a demo account. All, usually, at little or no price at all.
Abundant Educational Resources
Perhaps, more than any other financial instrument, Forex has a robust volume of resources. There are broker-reviewing websites, tons of educational materials and videos, signal providers, and strategy tutors.
The abundance of those resources does not mean they are all free. However, most are free while some are offered for a price.
The Cons of Forex Trading
Yes, the Forex market is on 24 hours every day. However, this may also be a drawback sometimes. This nature of the market can make it tempting for a trader to engage in reckless trading. A compulsive trader can trade every time, an opportunity for the around-the-clock nature of the market provides.
Of course, the Forex market is open 24 hours every day. However, it does not mean that every time is a good time to trade. There are variations in the behavior of the Forex market at different times of the day. Also, periods of the day experience differing levels of volatility for the different currency pairs. Consequently, to be successful, a trader should not be compulsive. Instead, he should trade only during those times of the day when the market is fluid enough.
High Leverage A Blessing or A Curse
Leverage, perhaps, is the most appealing feature of Forex trading. Traders benefit from it to start small, control large positions with small accounts, and still reap significant profits. For Forex traders, leverage is the ultimate blessing.
However, it can also burn. And when it does, it does fiercely. If not capped and adequately managed, it can give off tremendous losses. Therefore, a Forex trader must learn to use it reasonably. Else, he will get kicked out of business by it prematurely. To control leverage, you should not risk more than 2% of your account on a single trade.
The odds are stacked against the retail Forex trader. For the most part, large financial institutions dominate the Forex market. They move the price. A single entry by a bank, hedge fund, or pension scheme can turn the market around. In the sea of Forex, retail traders make a small though the notable amount of water.
Moreover, institutions have enough adequately trained experts, enough money to trade with, and state-of-the-art software and hardware resources. Most of those resources are not available to retail traders. And those better-equipped institutions are the ones retail Forex traders compete in the market with. Therefore, a retail Forex trader has to be disciplined and diligent to draw the odds in their favor.
Lack of Centralisation
Unlike stock, Forex trading is not centralized. The American stock market, for example, has the New York Stock Exchange (NYSE). Canada has the TSE (Toronto Stock Exchange). This nature of stock markets ensures that they have adequate oversight. It also makes them reasonably consistent.
However, the opposite is the case for the Forex market. The Forex market is not centralized. It does not have an exchange or a clearinghouse. This reality effectively makes each Forex broker its own exchange. Unfortunately, many unscrupulous Forex brokers and industry participants explore this to scam traders. Many Forex brokers in some territories are not regulated. They can therefore easily pull fraudulent stunts.
Therefore, a retail Forex trader should ensure that his broker is duly licensed and regulated. At Doctor Forex, we have a database of regulated brokers and a comparison of their services.