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Benefits of Forex Trading: Advantages and Disadvantages Guide

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Most investors in the modern market choose Forex to join the global financial world and start trading. It is also known by the initials FX, which stands for Foreign Exchange. This rapidly developing market is considered the most suitable for beginners in the trading world. Popular banks such as JP Morgan and UBS, as well as various financial institutions and brokers, are the economic entities through which investors can buy and sell currency values such as US Dollars, Euros, etc.

The Forex market allows trading of any type of securities in various currencies depending on each trader’s investment strategy. Thanks to the great flexibility in time and market terms, FX offers considerable advantages and opportunities for all investors in comparison with other markets. In this article, we will outline the main features of Forex, what are the benefits of Forex trading, and its possible drawbacks.

The article covers the following subjects:

Advantages of Trading Forex

Forex trading has gained extreme popularity in the financial world due to its numerous benefits that led to its popularity. Below is a list of FX advantages and a brief analysis of each one that explains why so many investors are choosing this type of market.

Global Financial Market

One of the most significant advantages of the Forex market is its popularity in the trading world. In the last two decades, FX has spread all over the world, becoming a global financial market that is used by all traders in every corner of the globe. Approximately 195 countries are a part of the Forex market. It is estimated that the daily transactions that take place through Forex platforms exceed 3.6 trillion dollars on average. That makes it the largest global market with future potential for higher development and vast scalability.

Variety of Currency Pairs to Trade

The Forex market allows investors to choose the pair of currencies they want to trade with. Through a wide list of choices, traders can buy and sell assets depending on their investment strategy. Some currency pairs can be more easily traded than others due to their high volatility. It is estimated that there are around 128 pairs that traders can choose to trade with. Below are some popular currency pairs:

  • Euro/US Dollar (EUR/USD);

  • US Dollar/Japanese Yen (USD/JPY);

  • British Pound/US Dollar (GBP/USD);

  • US Dollar/Canadian Dollar (USD/CAD);

  • Australian Dollar/US Dollar (AUD/USD).

It’s Good for Beginners

FX is considered to be the best way for beginners to start their trading career. It offers great accessibility to the market since it doesn’t require a big amount as an initial deposit and has a low level of risk. Moreover, most Forex platforms provide free demo accounts allowing newbies to get a taste of market movement and develop a trading strategy. The low capital barriers, as well as no commissions on most accounts, are some of the reasons that Forex is picked by most hobbyist traders.

Low Capital Barriers

In comparison with other markets, Forex doesn’t require a high amount of initial investment. A small investment can lead to high profits. For example, a newbie can enter a capital of $500 and trade with a leverage of 1:500. This can lead to great profits, but also may work conversely with high potential losses. 

No Commissions on Most Accounts

Foreign Exchange has small or no trade commissions. Moreover, the FX market doesn’t require fees on any exchanges that occur, since brokers can profit from the “spread”.

High Liquidity Market

Since Forex has such a big spread and is used by an enormous number of traders, it offers high liquidity in contrast with other markets. The Forex trading market is constantly operating, and thanks to modern technology, is accessible from anywhere. Thus, anyone can buy or sell with a simple click of a button. Moreover, through sophisticated AI algorithms, investors can automate their moves, making the flexibility of investments even bigger. As a result, there is always a potential retailer waiting to buy or sell.

Volatility of the Forex Market

Price volatility is one of the most important factors that help investors to decide on their next trading move. For short-term traders, price volatility is crucial, since it depicts the hourly changes in an asset’s value. Moreover, swing traders use this indicator to define when is the proper time to enter or exit the market. For long-term investors, the volatility of the Forex market is also fundamental. This is why they consider a “buy and hold” strategy may offer higher profits after a long period.

Possibility of Hedging

Another significant advantage of Forex is hedging. This is an efficient method that helps investors either eliminate or reduce their losses. When traders refer to the technique of hedging in Forex, they mean the strategical move of opening several positions. The main point of this is to limit the potential losses to an acceptable amount. Most investors hedge Forex by investing in different yet related currency pairs. This way, when one pair goes long the other goes short, and they can balance the losses with the profits.

You Can Trade 24 Hours a Day

An important difference between the stock and Forex markets is that the latter works 24 hours a day without closing. The four main trading sessions are divided as followed: 

  • The Sydney Session;

  • The Tokyo Session;

  • The London Session;

  • The New York Session.

In the 24-hour Forex market, traders can start their moves when the Sydney Session opens until the close of the New York Session. Also, specialists divide Forex trading into four sessions depending on the geographical area:

  • Pacific Session (Sydney Session);

  • The Asian Session (Tokyo Session);

  • The European Session (London Session);

  • The North American Session (New York Session).

Suits Varying Trading Styles

Before a new investor enters a Forex trade, he needs to define the strategy to follow. Depending on the time and effort, traders can be divided into categories. Some of them are the following:

  • Scalping;

  • Day Trading;

  • Swing Trading;

  • Position Trading.

Forex trading can be efficiently applied in any of the strategies above. Moreover, due to the Forex market’s great volume and its high liquidity, investors can enter or exit the market any time they want.

Convenient Technology for Trading

Forex trading is a new method that was recently introduced to the market. Its decentralized nature demands continuous connectivity and adaptability. This is why a great number of developers are constantly working to improve this technology and make Forex trading platforms more suitable for modern finance demands. Thus, technological innovations help Forex trading to become even more widespread since everyone can trade from anywhere in the world. 

No fixed lot size

In the Forex market, there is no fixed lot size. Thus, traders can start with the trade size of their choice. There are three types:

The micro lot is commonly used by beginners and helps them have more effective risk management. Traders choose their trading size depending on the number of lots they are interested in either buying or selling.

Well Regulated

Forex trading is a decentralized technology that functions with no central management. That’s why it is more vulnerable to fraud and other types of perilous activities such as misleading promises, excessive risk levels, etc. Thus, Forex regulation was developed to establish an honest and ethical trading attitude. 

Moreover, foreign brokers must comply with the criteria that are defined by the Forex regulator. Depending on the country where the company is, its base FX has different regulations and applications, which ensure investors that they can withdraw their money anytime, even in the event of bankruptcy. Traders secure their funds by depositing them in other accounts separate from the brokers, so the latter cannot use foreign money for their own business. 

In the list below, you will find some of the most popular FX regulators:

  • Australian Securities and Investment Commission (ASIC);

  • Financial Conduct Authority (FCA);

  • Commodities and Futures Trading Commission (CFTC);

  • Securities and Exchange Board of India (SEBI).

There Is No Central Exchange

Forex does not have a physical entity, which makes it a remarkable example of a decentralized market. Thus, all the transactions can be made from anywhere, and since it is open 24 hours a day, it can also be done at any time of the day.

For example, if an investor is located in Europe, he can trade during North America hours and monitor the moves of the currency he is interested in. Through the internet, FX traders can buy or sell securities as well as check the status of currencies from different dealers around the globe.

There Are Low Transaction Costs

In comparison with the stock market, Forex has very low transaction fees. This is because brokers earn their profits through “Points in Percentage” (pip). Moreover, some brokers can offer a very high spread and reduce or even eliminate the trader’s costs. Investors that choose the Forex market can boost their profits by avoiding fees from exchanges, deposits, and other trading activities which have additional costs in the stock market.

Advantages and Disadvantages of Leverage in Forex

In the table below are listed the pros and cons of leverage in Forex trading:

Advantages

Disadvantages

Leverage in Forex may lead to high profits.

There is the possibility that leverage may enlarge traders’ losses.

It gives the option to enter the market with a small budget and trade with high-value currencies.

Often, it is considered a liability. Some traders may not fulfill the demands of high leverage at the end of the transaction.

Traders can make a smaller effort and yield high profits.

High leverage is connected with high interest.

Leverage is a factor that boosts capital efficiency.

Easy profit may lure inexperienced traders to use up all their budget resources.

It provides support to the market due to low volatility.

 

Disadvantages of Forex Trading

Lack of Transparency

The Forex market is based on decentralized technology. Thus, FX lacks transparency due to significant factors, which are listed below: 

  • Counterparty Risks. Since FX is a global market, it is difficult to comprehend the fast changes and the different regulations of each country. Forex trading may have rules to protect the investors and traders, yet there is the risk that someone may not respect the agreed contract.

  • Operational Risks. The Forex market works 24 hours without stopping. Traders cannot monitor the changes daily, so they use algorithms to protect their interests and their investments. Thus, they need to be constantly informed on how the technology works, otherwise they may face great losses during the night or on weekends.

  • Leverage Risks. Forex offers high leverage to traders. New investors may not understand the dangers that this investment tool hides, and lose all their investments in a matter of minutes.

Complex Price Determination Process

A major problem in the Forex market is the difficulty to determine the value of the currency pairs rate, which can be influenced by various factors such as politics, economic changes, central banks, etc. That is the main issue that should be taken into consideration since the wrong interpretation of a chart can lead to significant losses.

High Volatility

When traders refer to volatility in Forex, they mean how big the upswings and downswings of a currency pair are for a specific period. The larger those ups and downs are, the higher the volatility. Those big changes can evoke a sense of uncertainty, and sometimes traders consider them as a chance for high profits. However, they can be proven wrong, and it may lead to uncontrolled losses. Some of the most volatile currency pairs are considered to be the following: 

Conclusion

The Forex market offers a lot of privileges to traders. Once having decided to trade on foreign exchange, both experienced and new investors need to define their financial strategy and get familiar with the terms and conditions. Although Forex’s advantages outweigh its disadvantages, traders still need to be aware of the pitfalls and develop a robust risk management strategy to limit potential losses.

Benefits of Forex Trading FAQ

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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