Forex Trading – Advantages & Disadvantages

Foreign Exchange (or Forex, FX) is one of the world/s largest financial markets, if not THE biggest. Its daily turnover is about $3 Trillion dollars, it deals with the real-time exchange of currencies of different countries. This currency exchange market has a much bigger volume of buyers and sellers than any other market, combined.

Some of the major Forex centers around the world are: New York, Tokyo, London & Sydney, Forex is also the only market that is open 24 hours a day, almost 6 days a week…around the world. Forex is a speculation market, and one of the biggest obviously. It is well known for the volume that is traded, its superior liquidity as well as the steady trading. This attracts high levels of leverage, meaning you could buy 100,000 units of a currency for only 100, if your broker allows you to do so.

Advantages:

High Leverage – Usually you start with 100:1, this is really a relatively unique feature for the Forex market. You could turn a huge profit by simply investing small amounts.

Superior Liquidity – Most of the trading done on the Forex market is comprised of the main 7 currency pairs, due to the high volume of the trades this tends to exhibit some positive side effects on the currencies themselves. Price stability and little slippage are just two of many.

24 Hour Trading – Forex currency trading offers its traders a 24 hour trading opening, in this time an investor can trade at any time of the day, any. The market is open from Sunday 5pm (ET) to Friday 4:30pm. This gives traders a huge advantage, knowing when the market is closing or opening is a big piece of the pie. Traders use this to enter or exit trades at key times.

Profitability – The forex market can be called many things, one of them is an “over the counter” market. This is when a trader always buys one currency and sells the other in real-time, thus effectively hedging against itself in a sort of soft forex security system. There is no prejudice in this market, everyone profits equally.

No Commission – The forex currency market lets its traders keep 100% of their trading profits. If dealing with a financial market on an almost daily basis then the regular traders are the ones who really benefit by the no commission trading.

Disadvantages:

24 Hours Market – Although, as stated before, it is convenient for the market to be open 24 hours and a trader can trade from wherever, it can be a rough position as well. This is because it is not possible, at times, for a trader to keep track of the forex market for 24 hours a day. This is where the forex broker is beginning to show up, most people should get professional help with their trading for this reason alone. It is always better to deal with someone who can simplify the situation rather than the problem itself.

The forex broker can be described as a professional who keeps you updated on everything, from news to ticks to trades to prices. A broker will even tell you when to trade and when not to, they are your “guide” so to speak.

High Leverage – While this is also an advantage like above, this blessing in disguise can also drive traders away and can perceived as a disadvantage for them. With such high levels of leverage coming from a forex broker, comes a level of profitability AND loss that is just as high. As the saying goes “play big or go home”, if you trade big you can expect to win and loose big too.

Too much leverage on a forex account can lead to a margin call from a broker, this is a very bad thing as your account can be wiped completely if you don’t watch your trading positions. This is where money management comes into play.

Like every other market out there, the forex market is going to have its ups and downs. Being aware of the two is what gives good traders their profits. Knowing when to trade, the time of day/week, what size lots etc etc. Take these points and learn them, make them your routine and you will profit.