Forex trading has emerged as a popular career in recent times with its 24/7 schedule and easy accessibility. Being your own boss, working from the comfort of your own home making money using your laptop or mobile when it suits you is more than enough motivation for anyone to consider forex trading as a new career, or even just a means to make a bit extra on the side. However, it isn't all fine and dandy as forex trading has its disadvantages to accompany its advantages.
Pros
- Suits Varying Trading Styles
Forex Markets are in operation 24/7 enabling traders to work whenever it's convenient along with accommodating various different trading strategies. Short-term traders who take positions over short durations can operate at times that suit them including trading in complete off-hours and peak times, capitalising on small but significant movements. On the other hand you can also take long-term positions, which can last from days to several weeks. Forex trading is very accommodating in this way allowing you to tailor your approach however you wish.
- Low Costs
FX trading can come with very low costs in regards to brokerage and commissions. There are no real commissions with most forex brokers making profits from the spreads between currencies. This means you don't have to worry about including separate brokerage charges, eliminating your overhead.
- Offers Very High Liquidity
Compared with other financial markets, the forex market has the largest number of participants providing the highest level of liquidity. This helps to eliminate price manipulation and price anomalies, enabling tighter spreads. Unless major events are expected or happening, traders are able to observe similar price patterns of high, mid or low volatility throughout their trading.
- No Central Exchange
As Forex is basically an over-the-counter worldwide market, there is no regulator or central exchange. Various nation's central banks will occasionally interfere when needed, however these are pretty rare events only tending to occur under extreme conditions. Such a decentralized and deregulated market practically eradicates any sudden surprises. The chances of insider trading are practically nil as there are no insiders in the forex market.
- Low Capital Requirements
Tight spreads (in terms of pips) allows you to easily stat your forex trading with a small initial capital. Many other markets such as equities require more capital to make it possible to trade. Margin trading with high leverage is the icing on the cake for forex traders. Trading on such high margins comes with its risks, but it does in turn make it easier to increase your profits with limited capital.
- Volatility Means profit
Major currencies frequently display large fluctuations in value. A wisely placed trade on a high volatility assist comes with enormous profit making opportunities.
- Variety Of Pairs To Trade
There are 28 major, commonly traded currency pairs involving the eight major currencies. The variety of pairs allows you to pick based on your own criteria, from convenient timing, volatility, charts or economic developments. A forex trader who loves to trade volatile pairs can easily switch from one currency pair to the other and use it how they wish.
- Ease
There are hundreds (if not thousands) of technical performance indicators to take into account for short-term trades, along with a number of fundamental analysis tools and theories to help long term traders. This creates great choice for traders of all experience levels and skill to enter into forex trading.
Cons
- Lack of Transparency
Due to the deregulated nature of the forex market which is dominated by brokers, you are actually trading against seasoned professionals. As the market is broker-driven it isn't always fully transparent. You may not have control over how a trade order gets fulfilled, may not get the best price, or may get limited views on quotes which are provided by your selected broker. A simple solution is to deal only with regulated brokers who work under the broker regulators. The market has no regulators, but brokers do.
- Teaching Yourself
Traders are usually on their own with very little or no assistance. Continuous self-directed learning and discipline is the key to success in your career. Most quit during the initial phase due to losses suffered as a result of limited forex trading knowledge and poor trading.
- Complex Price Determination
The value of currency is influenced by a number of factors, primarily politics and economics which are difficult to analyse and draw conclusions from. Most trading takes place on the back of forex trading signals technical indicators, which is one of the primary reasons for the high market volatility.
- High Volatility
As macro-economic and geopolitical developments are uncontrollable and unpredictable it is extremely easy to see huge losses in the volatile forex market. When Iceland went bankrupt, forex traders holding Icelandic krona could only watch, along with the alleged scams with Iraqi dinar. The 24/7 markets make it impossible to constantly monitor prices and volatility. The best approach to limit vulnerability is to employ strict stop losses on every position and to trade systematically sticking to a plan.
- High Risk, High Leverage
Forex trading enables use of high leverage, allowing profit/loss exposure many times greater than your initial capital. Leverage of 50:1 if often allowed, meaning you only need £1 to take a position worth £50. While a trader can benefit from leverage any loss is also often greatly increased. FX trading can quickly turn into a vicious loss-making circle, unless you have a robust, substantial knowledge of leverage, efficient capital allocation, and a very strong grip on your emotions.
Often perceived as easy moneymaking career, forex trading is actually very testing and extremely engaging. Perseverance, development, efficient money/time management, calculated risk taking and a robust trading plan are needed to be successful in your forex career and take advantage of its many perks.
