FOREX is the widely used term for the foreign exchange market, and the banks & the brokers are synced via the electronic network to do business. The network allows the organisations to convert currencies worldwide, and thus, the foreign exchange became the largest liquefied financial market globally. For instance, the volume of the dollar can rapidly increase in trillions in a single day within the trading market.
Here, we would briefly understand the top advantages and disadvantages of forex trading.
Advantages of Forex Market
24 Hours Open: The forex market takes place all over the world and in a way, operates 24H/Day, five days a week. Foreign exchange is trading over the counter (OTC) which means transactions take place directly between two individual parties and is facilitated by a middle forex broker. Therefore, forex trading is not subject to the centralised exchange system opening hours.
If an exchange is open in the world, forex trading can take place. There are four forex exchanges around the globe, i.e. the UK, Sydney, New York, and Tokyo. All the four cities have different time zones, and thus, the forex exchange trading never closes, except weekends. Besides, the forex trading market rates keep moving even on the weekend, i.e. Saturday and Sunday, and thus, traders should be aware of this vital factor.
High Leverage: Second significant advantage of the forex market is high leverage provided by brokerage firms to retail traders. The margin can go up to 1:500, which means you will get $50,000 for every $100. However, the leverage depends on many other factors like region, trading asset, time of the trade, broker, and many more.
The margin trading opens new opportunities to traders for opening high positions with the small capital amount. Note that more leverage goes in line with risk, more margin trading exposes risk and thus, more loss.
Liquid Market: Liquidity is the ease with which a particular financial instrument can be bought or sold with no or low effect on its monetary value. Foreign exchange is one of the most liquid markets globally and can handle transactions even if the volume reaches 6.6 trillion transactions every day, which is a significant number. Further, it also denotes that the sellers and buyers are always available regardless of the currency types. If an investor wants to sell a currency pair, there’s a buyer in the market for that pair and vice versa if the investor wants to buy.
It is unlike the stock market, where if a particular share is in high demand, there are only buying and no selling opportunities with it.
Low Costs: Forex market needs little wealth for entrance and low transaction charges once you’re in. Many brokers charge some fee for trading but most of the good trading platforms, like T1Markets, earns through spreads. There is no commission or charge on executing orders and trading assets. Spreads are measured in pips, the unit to record changes in currency valuation, and used in the price of a currency pair.
Every broker provides one bid (sell) and asks (buy) price, and the difference between both of them is the pip. Spreads vary from broker to broker and can start as low as 0.03 for T1Markets broker, making trading currency pairs cheaper as compared to other trading markets. Note that the spreads vary on many other determining factors like time of the trade, and type of asset.
Wide Range of Pairs: Currency trading includes several forex pairs available for making profits. The pairs show the economic condition of a nation, and traders speculate on the countries to earn. The number of pairs depends upon the broker, like ROinvesting, that offers more than 45 currencies for trading. The top currencies which have the highest volatility are EUR/USD, USD/JPY, GBP/USD, etc. The pairs are categorised into four types, i.e. major, minor, exotic, and emerging currencies.
Both Sides Trading: Another good advantage of forex trading is you can go short as smoothly as you can go long. Forex trading is inherently two way, i.e. going against and in favour of the pair both and have no restrictions regarding it. For example, if you want to trade with the currency pair, USD/CHF, then you can go long, i.e. hoping that the pair exchange rate would rise, or go short, i.e. prediction that the pair would fall.
Disadvantages of Forex Trading
High Risk: Forex market is hazardous due to many factors, but the increased risk comes with good returns too. It is advisable to the novice traders to rationalise all their trades and take calculated risks.
Lack of Transparency: Forex market is not regulated, and thus, the problem of lack of transparency exists in it. Brokers dominate the currency trading market, and they might make alterations in the bid price, ask price, order execution, etc. in their favour. The investor has limited control over their trades, and he might not be able to see the best quotes.
Therefore, it is always recommended to look for only regulated and safe brokerage firms.
Scammers: In addition to lack of transparency, the forex market is filled with scammers and fraudsters and witnesses most fraud cases as compared to other trading websites. Thousands of traders get scammed daily after falling for promotions and bonus offers which are not more than traps.
No Centralised Body: Unlike stock or commodity trading methods, the forex market has no centralised, regulated exchange place which monitors activities. The trades are executed via forex brokers, and the rates are decided on supply, demand system. The process makes the brokerage firms market makers and many scam trading platforms vary their rates from the international market.
High Volatility: Forex market is highly volatile and is affected majorly by the news, events, and rumours, both positive and negative. The trading market has no centralised governing authority and is only controlled by traders and people, thus, works on the demand and supply phenomena. The high volatility is pitched by many as an advantage, but most of the trades convert into loss in the end due to it. Beginners should be wary of unstable nature and try to play as safe as possible. Remember, the currency market is not a race but marathon ground.
Top Broker Offering Forex Trading
101Investing: 101investing is a Cyprus based trading website that provides investment products to the clients. The firm offers a wide range of assets such as shares, crypto, currency, commodity, and indices, accounting around 350 financial instruments. The firm holds regulations from CySEC (Cyprus Securities and Exchange Commission) and works under the EU, MiFID, and ICF (Investors Compensation Funds).
Some of the top services include impressive education and research library, MT4 trading platform, wide payment options, and robust customer service. The demo account is available with the broker at no extra cost and can be used to test the platform services and trading style.
There are three account types, namely silver, gold, and platinum, which offer distinct services.
The Bottom Line
So, these were the top advantages and disadvantages of the forex market. Until now, the US dollar is the most traded currency in the world, and many times, the volume goes beyond the total equities in America as well as future markets. Note that foreign exchange is dominated by commercial & investment and government banks. Thus, it is recommended to do preliminary research before entering the market. The free demo account service by 101investing, T1Markets, or ROinvesting do wonder in it.