Forex trading has emerged as a lucrative career option for young graduates, people with financial backgrounds and experienced professionals. It is mainly due to high liquidity, 24/7 schedule and easy accessibility. But Forex trading has its own set of advantages and disadvantages.
- Low Cost: in forex trading the brokers make money from the spreads between forex currencies. Hence, unlike equity and other trading instruments traders do not have to take commission or brokerage into account to calculate the overhead charges of trading. It can be done at quite a low cost.
- Suits varying trading styles: Since Forex trading can be done 24/7, a trader can trade as per their convenience, trading style and personal goals. It is a real help to short term traders who enter into trades for few minutes to few hours. Off time trading for particular currencies though offers low profitability but it can be easily compensated with large trading volume.
- High Liquidity: Since market participants are highest in the forex market, liquidity offered by the market is also the highest when compared to any other market. You can not only file large orders efficiently without any price deviation, but the chances of price manipulation are also very less. High liquidity offers tight spread to traders and volatility of the market is almost uniform in nonstop trading sessions.
- No Central Exchange: Forex market is an over the counter market, and there is no central exchange or regulatory authority which is controlling the market. This means you will not get any sudden surprises or price change which often happens in the equity market. Apart from that, there is no insider trading in Forex market as there is no insider in the market. Deregulation is also responsible for low-cost trading and the ability of the trader to take short positions.
- Volatility is a trader’s friend: If a forex trader has placed its trades wisely then, he can make huge profits from high price volatility often displayed by major currencies.
- Variety of pairs to trade:In Forex market, a trader gets to choose from 28 major currency pairs involving eight significant currencies of the world. Traders can easily choose as per their time frames, market volatility, and economic development.
- Low capital requirement: Unlike other markets such as equity, future, and options, you can start trading at a very low capital in forex market. It is mainly because of tight spreads in terms of PIP and margin trading with highleverage factor.
- Ease of trading: You will get n numbers of forex technical indicators for short-term trading and fundamental analysis theories for long-term trading. Depending on knowledge and experience a trader can easily get started with forex trading.
- Lack of transparency: Since it is a deregulated market, it is mainly controlled by the brokers. A trader may not get a transparent view of the market, best prices, full control over his trade or price quoted be limited to a number of brokers selected by him.
- High risk, high leverage: on one hand leverage as high as 50:1 offers exponential profit-making opportunity, at the same time loss incurred by the trader can also be magnified with the same multiple.
- Self-directed learning: Unlike equity trading where portfolio managers, relationship managers, and trade advisors are there to help, in forex trading at the most time you have to learn by yourself. Such expert opinion is usually not available. A forex trader usually has to self-learn constantly throughout the trading career. Many early traders leave forex trading mainly due to heavy losses and lack of knowledge and guidance during trading.
- High volatility:Since there is no control of macroeconomics and geopolitical developments on forex market, traders often incur huge losses due to market volatility. In equity trading, you have an option to go to company management or regulatory authorities to initiate changes but it is sad that forex trader has nowhere to go.
The Bottom Line!
Though forex trading seems to be a lucrative and easy money making a career, but it is not the case. You require a lot of hard work, perseverance, constant learning, ability to manage risk and a robust plan of action and lot of patience in order to get success in the forex market.