Forex trading, like most trading activities, can have both favourable and unfavourable characteristics for traders. Individuals seeking to enter the forex market should weigh the advantages and disadvantages of forex in order to decide whether it's an attractive and appropriate market for them.
While there are some risks to forex trading, there are also many advantages that can make it a lucrative and attractive activity. These include the following:
The forex market is among the most accessible markets for individual traders. Traders can set up a forex account within a period of one to three days and begin trading with £50. Trading through most brokerages can be done online and traders have access to real-time market pricing, news, price charts, tools and strategies through online trading platforms. Also, the forex market is open 24 hours a day/5 days per week, meaning forex trading can more easily fit into traders' schedules than some other types of trading.
Access to leverage can make the difference between small gains in trading and sizable ones. Availability of resources for leverage in the forex market is greater than in most other markets. Depending on where they are operating from, traders may be able to obtain access to margin that allows leverage of 100:1, or more, for initial capital invested in a trade.
Potential For Fast Returns
The forex market is fast-moving and has deep liquidity. These characteristics, combined with the usually higher leverage available to forex traders, means there may be potential for faster returns in the forex market than in some other markets, where traders may need to wait for longer term "organic" asset value growth and returns from assets traded.
Easy Short Selling
Short selling in some markets may require borrowing assets and exposure to risk that a short position can be called away by the lender, but short selling currencies is simpler. Currencies are bought and sold in pairs, meaning whenever a trader buys one currency, they are selling another. Traders speculating that a currency will decline in value need only sell that currency and buy another paired with it, with no borrowing involved in the process.
The forex market is the largest market globally by volume. This means there is usually ample liquidity for trading, especially in major currencies. Traders who work with the trading desk model at forex brokerages are usually offered sufficient liquidity for trading as the brokerage itself will normally take up the opposite position of a trade when liquidity may be scarce in other portions of the market.
The forex market lends itself well to technical analysis. While equity and bond traders may need to delve deep into the fundamentals and financial health of share and bond issuers to assure their securities will yield profits, forex traders can frequently obtain profits using technical analysis of price charts.
Unlike fundamental analysis, which requires detailed background information about the financial health of assets, technical analysis is based on price histories and trends that yield clues regarding market perception of supply and demand, and sentiment about those assets.
Less Potential For Insider Price Manipulation
Stock, bond and even commodities markets can often be strongly influenced by private information held by insiders and key stakeholders of those assets. Control of the currency market, however, is far less centralised and less influenced by insider information.
Most often, the holders of any potential "inside information" regarding possible currency price movements are government officials or central bank authorities who are normally exposed to intense public scrutiny and usually subject to rigorous government oversight. This aspect of forex makes it one of the more transparent markets for trading.
Fewer Fees And Commissions
Trading in equities, bonds, mutual funds and other instruments is often subject to pricey commissions and sometimes hidden fees that can make trading more expensive than expected.
Quite often, forex trading costs are determined solely by the bid-ask spread, which is the difference between the bid (buying) and ask (selling) prices clearly published by brokers in real time. This is another aspect of forex trading that makes it more transparent.
Simple Tax Rules
Whereas traders in other markets may have to keep special tabs on their short-term and long-term trading activities for tax reporting, forex trading is often subject to more simplified tax rules that can make tax calculations easier.
Forex trading is also well adapted to automated trading strategies. With some study, forex traders can setup automated trades, programming entry, stop-loss and limit prices in advance of making a trade; or instruct the platform to trade on certain price movements or other market conditions.
A trader with a well-devised automated strategy may be able to take advantage of the day-to-day swings in the forex market without exhausting their physical and mental faculties putting in trades in an effort to keep up with the latest shifts in the market.
Traders in the forex market can face some adverse factors and conditions that may make successful trading more challenging than it may appear at first glance.
All markets can show volatility at one time or another, and the forex market is no different. Forex traders hoping for short-term profits may be exposed to unexpected extreme volatility at times, which can make their trading strategies unprofitable.
Small Traders May Face Some Disadvantages
More than US$5 trillion is traded daily on the global forex market and the bulk of that trading is still done by major players such as banks, hedge funds and other large financial institutions. Because of the volume of their trading, and their greater access to information and technology, these players can have a natural advantage at setting prices and influencing price movements in the market.
Again, this reality is true for most markets, but it's especially apparent in the forex market. Traders must stay abreast of the latest fast-moving changes in market conditions to be sure that their trading is profitable.
Lighter Regulatory Protection
The forex market is an over-the-counter market, meaning trades are not carried out on a centralised exchange, and regulatory oversight is sometimes limited. Because of this, traders may need to do a "due-diligence" investigation of their broker's reputation and trading practices before signing up for an account. Also, depending on which country they are operating in, they may also have less right to recourse if they feel they have not been treated fairly by their broker.
Fewer Residual Returns
Stocks and bonds often make regularly scheduled interest and dividend payments that can enhance the long-term value of buying an asset. However, forex trading customarily aims mostly at obtaining capital gains from appreciation of one of two currencies in a given currency pair.
On the other hand, forex positions held overnight can yield, or pay, interest. That depends on the difference in interest rates practiced in the countries issuing the currencies bought and sold. This interest is often referred to as "rollover", or "carry" interest.
Forex trading is an accessible, flexible and potentially lucrative activity within a large, liquid and transparent environment for trading. Taking into account some of the inherent risks to forex trading, many of which are present in other trading activities, forex offers ample opportunities for success to traders willing to become familiar with the conventions and inherent characteristics of currency markets.
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