Forex trading which also is called by another name “Foreign Exchange Trading” deals with currency trading.
Currency is the most important factor in this world. Currency trade exchange is liable and important for foreign trade and the import and export business.
For example, If a person is a citizen of the United States of America but wants to buy branded shoes or a dress by a famous designer who lives across in a another country like France or Paris, that person has to pay the currency equivalent to the currency rate in that particular country.
This transaction benefits the overall economy of the country and for the people it’s an investment to earn extra money by taking risk and trusting the uncertainty.
Anyone can get involved in Forex trading system to earn a little money because it doesn’t take a lot of capital to be eligible for that.
Before deciding to go on this venture it is always suggested to understand the following advantages and disadvantages of Forex trading.
As we have learned what is Forex trading basics and the importance of Foreign Exchange Trading from above, now let us study the Forex trading benefits and risks which will give a better understanding and knowledge if its trade advantages and disadvantages.
Advantage and Disadvantages of Forex Exchage Trading:
Advantages of Forex Trading:
The following mentioned are few benefits of forex trading and benefits of foreign exchange.
1. Flexibility in trading:
Foreign Exchange Market provides a lot of flexibility to the traders and business men with respect to trading goods and services.
There is no restriction or limit on how much currency to be used for trading.
Also, there aren’t too many regulations and rules in the market to be followed by the trader. This tells us that the market works on 24/7 hourly bases with no problem at all.
People with regular jobs can also find this option as a part time job because of its flexibility of time and work.
2. Individual Control:
One of the main and fundamental advantages of having a career in Forex trading would be that the individual himself has complete control with respect to making a trade.
There are no signs of anyone forcing the person in making a trade forex which he doesn’t abide with.
The individual who is involved in the forex trading business always has the final decision in their hand whether they would like to enter in making a trade and how much risk the trader is willing to take with respect to earning his money.
When an individual is newly entering into the world of Forex trading, at the moment they are a rookie and are new to it.
For such an individual a ‘Demo Account’ which is considered to be a replica to the way of the live trading system can be used by him to gain knowledge and Forex trading practice.
There is no risk involved and the person actually realizes whether a Forex trading career is best suited for him.
This is also considered as a great means towards testing, improving and organizing new skills which may be beneficial in the future.
4. Transparency in information provided:
The Foreign Exchange market is big and large in size and operates 24/7 across all country in different time zones.
Even though the Forex market provides information easily to the public about its rates and current forecast.
It is fairly judged that it is a short term advantage because of the time taken for the information to be passed but if taken into mind the size of the market, it makes it fair and to be understood of it circumstances.
5. Wide Options:
There are many options available in the Forex market. The business man or traders, importers and exporters can use wide variety of Forex trading market to its own advantage by trading in various currencies in pairs.
There are many choices available, an individual can enter into spot trade or future agreement contracts.
Thus, forex market provides a lot of variety to its investors to trade by keeping in mind the budget and the risk taking factor.
6. Reasonable Cost:
Foreign exchange trading gives a lot of option but it also is a low cost investing compared to other means of investment.
It’s a reasonable factor of trading and investing. If done comparison on percentage basis, the forex market is pretty reasonable compared to other markets.
This is because of the direct involvement of the dealers by reserving themselves for covering the risk therefore, not so much of brokerage is involved.
7. Profitable Gains:
Forex trade markets provide the maximum leverage compared to all the financial investing market out there.
This facility gives them an added advantage to lever their investment that had been done before 20 to 30 times more and trade in the foreign exchange market.
Even though if the operation of Forex trading market is small but still the investor can lose or win a big profitable amount.
8. High Liquidity:
Foreign exchange market has the largest and highest number of participants compared to other financial market.
This promotes higher liquidity which brings forth the big players in the market which fills the large orders of the currency trade.
It actually eliminates the price manipulation and doesn’t deviate from the original price, thus promotes efficient pricing.
9. No involvement of Central Exchange:
There is no involvement of Central Exchange but they interfere in the market but under very rare cases and extreme conditions.
Such a market gives more advantage for the investors to not come through a situation of sudden surprises in price falls or price manipulation.
The market doesn’t change compared to the market of the company or organization which deal with equity shares and etc.
In Forex trading an investor can easily switch to another currency if that person finds profit or good investment in that.
There is a lot of risk factor involved in investing money or capital in such capital driven market but volatility gives higher profit by switching over one currency to whichever gives a good return.
This ultimately gives a good advantage to decrease the risk factor and increasing profit.
11. Works 24 hours:
The Forex trading programs operates 24 hours in a day and 7 days in a week so in short it is always functioning no matter what is the situation it doesn’t get affected.
The traders can take this as part time job and can work in whatever conventional hours they are comfortable in. An individual can view the current market trend and get updated anytime.
The confidence level increases when the investor hit the jackpot which in turn creates goodwill. With the high level of confidence the investor can be overly active in trading currency which can create traffic.
Traffic often leads more investors in dealing with currency and this can give more profit and can earn more money.
Now, we know the advantages of Forex trading so let’s move on to the other side of the story. A coin always have two sides and in life there is two sides in every factor therefore lets learn now the disadvantages of Forex trading.
Disadvantages or Cons of Forex Exchage Trading:
When a brokerage is involved it often leads to lack of transparency and less outcome of the investment.
Therefore, in Forex trading there are few brokerages who involved in Forex trading. It’s better advised to go and look for a broker who follows all the rules and falls under the category of broker regulators.
The market may not work always under the regulations but it may work under the activities of broker.
2. Price determination process:
The process of price determination process in foreign trade exchange is often considered to be complex because of the complex price determination process. The rates are influenced and they fluctuate by multiple reason and factors.
The global politics and economy influence majorly in the rate of the currency thus creates uncertainty of the price.
The trading is always done on technical knowledge and indicators which indicates whether its going to be a loss or no.
3. Risk factor:
There is a risk factor involved in Forex trading market. There is a high leverage which results in higher risk involved.
There is uncertainty of the price and the rate of the currency which ultimately give higher profit or a huge loss so one has to be very focused and knowledgeable about the foreign exchange market where future forecasting can be accurate and profitable.
4. One Man Show:
In this market you can seek trade managers or advisors and relationship managers for advice but Forex traders are on their own when it comes to foreign trade exchange.
Usually new comers quit when they enter the market because of the losses they suffer while entering the market with their limited knowledge about this market.
5. High Volatility:
The high Volatility characteristics of the Forex trading can either be an advantage or disadvantage.
The changes in the global politics and economy drastically changes the forecast and diagram about the Forex market thus it makes it difficult for the investors to take risk and invest money.
It can cause a huge loss to the investors if the market goes down hill and when a loss is incurred a huge amount of money will go as a loss.
6. 24 /7 Market:
This market never sleeps and thus the same goes to the investors also. The investors when they invest money they have to be updated with the market trend which gets updated every minute.
The market can go unpredictable at any hour so the investor has to be attentive and conscious about the fluctuation of forex market which can happen any minute of the day.
7. Social trading:
Free exchange of information on the internet is an advantage because an individual can easily look up to the market condition and invest.
But using social trading one can might follow the wrong inexperienced trader and result in adequate loss over time.
So it’s preferred to look up for a trader who is experienced and can invest the money properly which can result to heavy profit in future.
8. Over Confident:
As time goes by for a person in the world of Forex trading, they experience a set of trades which they win and fail to realize that they may lose the next trade.
At this moment the level of overconfidence arises with an individual and he fails to realize that he may not always win.
The person may lose his discipline and takes every other trade as similar to the other which leads to over confidence which causes an obstacle in his progress.
To enter the Forex trading market one should have adequate knowledge about how the market works so that particular individual has to take some classes or courses to know the in and out of the foreign exchange market.
It is better if an individual gets educated before entering this market or else that person has to bear heavy losses in future.
Another disadvantages of Forex trading market is that there are a lot of scammers who are ready as foxes drooling to loot the money from the investor.
So the investor has to be very careful about identifying a trust worthy, reliable person who wont cheat and can give better returns.
Therefore, Forex trading market is filled with frauds and cheaters but it totally depends on the investor to take a decision and go with the right person.
For a Forex trading, there is risk factor involved which creates fear among the traders. It makes trading difficult for the traders because the fear is been inculcated in them because of the uncertain environment.
Therefore a trader has to be mentally strong and well educated to invest their money smartly. This disadvantage can be overcome by selecting a brokerage that has perfect knowledge.
After learning and understanding of forex trading pros and cons stated points above, it’s preferable now to take a right decision whether to go for it or no. With the promises of bigger returns the Forex market also gives bigger loss and risk. One has to be mentally strong while investing into this.