Pros and Cons of Forex Trading

Before
we dive into our main intentions, let us first know what a forex market is.

The
foreign exchange market, also known as forex or simply FX is the biggest and
most liquid market worldwide, with trillions worth of dollars being exchanged
every single day.

Building
a career as a forex trader could be profitable, flexible, and highly engaging.

Yet,
there is an abrupt learning curve in this industry and traders are currently
facing high risks, leverage, and volatility.

Let
us now explore the pros and cons of forex trading!

PROS:

Simple
to Enter

Short-term
traders could rely on hundreds of forex technical indicators available, while
the long-term ones could depend on fundamental analysis theories and tools.
These would create tons of choices with varying levels of experience for a
smooth entry into the forex market.

Cheap
Capital Needs

You
can easily start to trade in the forex market with only a small amount of
initial capital due to tight spreads in terms of price interest points (pips).

To
compare, it would be very impossible to trade in other markets like stocks,
futures, and options if you don’t have a huge amount of capital.

Low
Costs

Trading
in the forex market is low costs for brokerage and commissions since there is
no commission in a real sense as most foreign exchange brokers are making their
profits from the spreads between forex currencies.

Hence,
you should not have to worry about having separate brokerage charges. In
comparison to the stock market or other securities trading, where the brokerage
structure widely varies, a trader must consider such fees.

No
Central Regulator

Forex
trading is operating in an over-the-counter (OTC) market operating worldwide,
and there is no central exchange or regulator.

Occasionally,
the central bank in some countries is stepping in when needed, but these are
very rare events that only occur in extreme conditions.

Also,
this low level of regulation helps the market keep at a low cost since orders
are directly placed by the broker who executes them.

Adding
to the advantage deregulated market is the ability of traders to take short
positions, which is banned for a few security classes in other markets.

High
Level of Liquidity

The
forex market has the biggest notional value of daily trading, providing the
highest level of liquidity. This means that even large orders of currency
trades are easily filled without any huge price deviations, eliminating the
manipulation and anomalies in prices.

CONS:

Self
Learning with no Assistance

Forex
traders are completely on their own with no assistance throughout their journey
in the foreign exchange market, unlike in the stock market where traders could
ask for professional help such as portfolio managers, trade advisors, and
relationship managers.

Lack
of Transparency

Since
the forex market is deregulated in nature and dominated by brokers, traders
seem to be competing with professionals. This broker-driven field means that
the market itself might not be fully transparent at all since a trader has no
control over how his trade order gets fulfilled.

Complex
Price Determination Process

It
is important to know that forex rates are largely influenced by several factors
such as global politics or economics, which could be hard to analyze
information and draw reliable conclusions. Hence, most forex trading happens on technical
indicators, but getting it wrong would result in a loss.