Pros and Cons of Dealing in the Forex Market

Of all the known financial market, the forex market is the largest and most liquid. Over $4 trillion USD is transacted every day, with more than $1.5 trillion going to spot trading. Though forex has lots of benefits, it also has its own risks.

Benefits of trading in Forex

Compared with other financial instruments, trading in forex using cash offers lots of benefits.

1. Absence of Middlemen

There is absolutely no need for middlemen when it comes to spot currency trading, and so this gives you more control over the pricing of a currency pair. To reduce execution time, trading orders are instantly sent to liquidity providers, thereby cutting out middlemen.

2. Lower forex trading cost

The cost incurred by forex traders comes from the spread. Spread is what remains after the asking price has been deducted from the bid.

Spreads incurred by forex traders is often lower than that incurred in other financial market like stocks. It can then be said that OTC forex trading is very cost effective. Just like every other financial instrument, forex trading has its own set of risks.

3. 24- Hour Market action

Forex is a market place where transactions are conducted on 24-hour basis, beginning at 5pm ET Sunday and ending at 5pm ET Friday. This means greater flexibility. You can either trade on full or part time basis depending on your personal preference.

Being the largest market in the world, forex market offers high liquidity which can be accessed at every hour of the day. You won’t find this in other 24 hour markets. In simple terms, if you decide to trade out millions of dollars, the market won’t feel it a bit.

4. The market can’t be influenced

Due to its sheer size, no individual or entity can control the price of the market for a long period of time.

5. You determine your lot size

Spot forex trading gives you freedom to determine your position size. FinFX traders are given the freedom to trade with lots sizes as small as 0.01 lots (1000). This means you can trade for as low as 100 USD/GBP/CHF/EUR.

6. Trading on Margin (Leverage)

The difference between Margin-based account and credit-based account before you trade on margin account, you will have to create an account with a broker, and then funding the account by depositing money into it.

After funding the account, you are then free to trade as you wish, provided that there is sufficient margin left in the account.

With leverage, you can actually to trade large positions which may not necessarily commensurate with the balance in your account.

In simple terms, you stand to benefit more returns when trading on leverage.

Though leverage trading offers lots of return, your chances of losing money is very high and this can happen at speed of light.

Just like every other financial market, there are risks involved with forex trading, so you should read this post to know more about forex risk management.

The risks involved with forex trading are:

1. Operational Risk

Every business transaction carried out in spot trading has its set of operational risks. Most of these risks come from human resources, technology, internal procedures and organizational structure. Though these risks do not affect the entire market, they are capable of hindering you from monitoring the position of all your placed orders. It is imperative for forex traders to have contingency plans in place in the event internet or power loss occurs.

2. News and Economic risk

In the global economy of today, the forex market gets disturbed when news fly in from different corners of the world. These disturbances often take the form of alteration of trend direction, rapid price movement, and long-term outlook. As a rule of thumb, it is important to keep a watchful eye on news or government reports that have the power to affect your profits.

3. Price Risk

There is no such thing as last price when trading in forex. Current bid price stream is used in determining the price of forex.

4. Interest rate risk

Conventional wisdom states that when interest rates rise, a country’s currency will grow in strength as investors will juggle to invest in the country so as to accrue high returns. In the same sense, the strength of a currency will decline when interest rates fall as investors will move their investments somewhere else in search for higher returns.

5. Leverage Risk

Leverage is a system which allows a trader to control large market position through the use of small investment. You can control as much as 400 times the value of cash contained in your account. But a seasoned trader will always advise you not to exceed 10 times what is contained in your account when trading in forex. Added to that, good money management requires that you risk only 2 to 3% of money contained in your account when trading.

You will have to bear whatever risks that comes with your forex trading. The consequence of these risks, are often bitter.