If you’re just starting out and testing the waters, forex trading might be quite overwhelming. This is especially true if you’re not
aware of the benefits and risks that it entails.
Knowing which is risky and which is beneficial tells you
what steps to take and not to take. After all, trading is all about risk and
rewards. Aside from picking your desired trading style (day trading, swingtrading, momentum trading, position trading, options trading, futures trading,
etc), you also need to consider the amount of risks you’re willing to take in exchange
for potential rewards.
The following list articulates the basic benefits you’ll get
as well as the risks you have to face. Read on to learn more about them!
Currency Trading: The
Benefits
You can trade different currency pairs all day if you want,
since the forex market is open 24 hours a day, five days a week. It’s also the
most liquid and most traded financial market.
Whether you want to trade currencies in the currency options
market (controlled by physical exchange) or the forex spot market (where you
trade OTC with some help from a broker), it’s your call.
It goes without saying that it offers distinct benefits
other than those found in the stock market, real estate, commodities, and other
such markets. Let’s take a look at some of them.
Low Costs
If you trade in the forex spot market, there is usually no
clearing fees, minimum government taxes, brokerage fees, no exchange fees, and
no commissions. This means that more of your money and gains will go straight
to your earnings than to charges and fees.
Meanwhile, retail forex brokers make some bucks only from
the bid/ask spread. They may also earn from swap chargers.
There’s No Need for
Middlemen
Unlike the old days, spot currency trading does not require you
to hire a middleman. Therefore, it allows you to trade directly with the
market. In turn, the market decides the pricing of a specific currency pair.
Cheap Transaction Costs
Along with almost-zero charges from the market, currency
trading usually have a bid/ask spread of lower than 0.1 percent.
More importantly, for larger dealers, the costs could even
reach as lower as 0.07 percent.
No Fixed Lot Size
If ever you’re not trading futures or options, the spot currency
market sports no fixed lot size for trading.
Typically, brokers give you the option to buy more than one
lot size, such as standard lot, mini lot, micro lot, or even nano lots from
brokers who allow them.
24/5 Market
As we have indicated above, the forex market is open 24
hours a day, 5 days a week. It’s open from Monday morning in the Australian
session to the afternoon close of New York session. This means that the market
is always open.
This makes it very convenient for those who want to have a
flexible trading schedule. You can trade on a part-time basis and choose your
own time.
Nobody can Take Over the
Market
The foreign exchange market is estimated to have 5.1 trillion
dollars, as well as a staggeringly large number of participants.
This means that it’s near-impossible, if not impossible, for
a single entity to take control of the market for an extended period of time.
The Power of Leverage
Leverage is one of the most powerful tools that you can use
in the currency market. Leverage enables to trade more money on the market than
what is available in their trading account.
Leverage is very popular among traders because it lets them
earn disproportionate amount of money from relatively smaller capital. The downside
is that it also magnifies the losses you may suffer if the trade doesn’t go as
planned.
Highest Liquidity
Also said above, the forex market is extremely liquid in
nature. Under favorable market conditions, you can buy and sell currencies
instantaneously and as required.
Aside from that, high liquidity also enables you to place
large orders that will be executed without influence the currency exchange
price too much. In other words, you won’t get stuck in a trade.
Low Initial Capital Required
It’s comparatively easier to enter the currency market than
other markets since it also requires lower initial upfront capital. As mentioned
above, you can start trading using mini or micro accounts, depending on what
your broker offers. These types of accounts
typically require around $25 to $50 as
minimum deposit.
You can Earn even from a
Falling Market
There is no restriction in directional trading. This is very
appealing for many traders since it enables them to take advantage of a falling
currency. After all, whenever you trade currencies, you’re practically going
long on one currency while simultaneously short selling the other.
For rookies, if you think that a currency will increase in
value, you can buy it. If you think its value will depreciate soon, you can
short sell it. For both position, as long as the trade goes as predicted, you
will make some money. Even market crashes and market corrections can still be
profitable—you can even take advantage of the bear market.
Free Materials and Perks
Another feature that the currency market sports that makes
it more appealing to traders is the access to free tools and materials that
could help you formulate better and more effective trading decisions before trading
live.
A really large chunk of all forex brokers offer demo
accounts for practicing. If you want to test a trading style before you start
actual trading, you can do paper trading. You can also use this as a chance to build
up your trading skills as well as your risk management skills and risk tolerance.
All you have to do is know some tips to make the most out ofa demo account and other free tools and materials.
Currency Trading: The Risks
Just like other markets and all trading strategies, currency
trading also sports a lot of inherent risks and dangers. These risks cannot be
completely removed, but they can be minimized as long as you’re aware of them.
We have listed down the most common risks and dangers that you might encounter
when you try out forex trading.
Low Transparency
The low transparency of the currency market is a result of the
domination of forex brokers. Bear in mind that the currency market is decentralized
and de-regularized, giving brokers much control over the transactions.
As a result of being broker-driven, the market is not fully
transparent. This implies that you may not get the best price all the time.
There’s also the chance that you won’t get unlimited views on trading quotes as
furnished by the currency broker.
However, there’s a simple fix to this problem. All you have
to do is to find a regulated brokers that fall under the control of reputable
regulators.
There’s No Centralize
Exchange
Different from stocks or futures, the spot currency market doesn’t
sport any kind of centralized exchange. Instead, each of the brokers serves as
its own exchange, giving them the power to essentially become the market maker.
The obvious downside to this is that some brokers find ways
to abuse the system, as evident on price variations from broker to broker.
Complex Price Determination
In the forex market, the price determination is quite
complicated due to the process being composite. The exchange rates are affected
and influenced by a plethora of reasons and factors, which include global
politics and global economy.
This makes currency trading a little bit more difficult to
understand. Also, it’s not advisable to trade only on the basis of technical analysis and indicators.
Learning Curve
While there are myriad tools that you can use to familiarize
yourself with the market and become well-versed, the learning curve is still
self-directed. This means that you will still shoulder the task of learning all
the quirks of the market.
According to data, over 90 percent of beginners quit trading
after the initial phase. This is because of the high losses they make due to inexperience
and mistakes in trading. Mistakes happen, but they’re extra difficult to avoid
if you’re not aware of the mistakes you should avoid.
Leverage Risks
Already suggested above, leverage is a double-edged blade. While
you can gain tremendous amounts of profits, you’re also at risk of incurring
equally large losses.
Forex brokers typically offer 200:1 leverage, depending on
the country you’re in. This can become a trading nightmare if you’re not
careful with the use of leverage.
High Volatility
Volatility is a friend and an enemy at the same time. Volatilityand risks come together. Overall, volatility sports advantages and
disadvantages.
If you’re not familiar with how much volatility you can comfortably
endure, you may end up making the wrong entries and exits on your trades.
Changes in the global policies and economy can quickly change
the forecasts on currency movements. Therefore, it would be difficult for you
to judge your next decision. As a result, you incur higher risks of placing a
loss-making trade. You can fix this, however, by making sure you place the
right kind of stop-loss orders and trailing stops.
Interest Rate Risks
Different countries have different central banks. And these
central banks have different policies. They are the ones who decide the amount of
interest rates on top of borrowed money. The variation of interest rates can
largely affect currency exchange rates.
If a country’s interest rates rise, the currency strengthens
since there will an increase in the inflow of investments in that particular
country’s banks. On the other hand, if the interest rates fall, the currency will
be weaker, since investors would start to withdraw the fixed investments they
have.
Social Trading
While associating yourself with many other traders can be
really useful when gathering information and market updates, it may also be
disastrous.
The exchange of information among traders nowadays is really
fast, almost instantaneous. However, if you don’t know which information really
matter and which to ditch, you might find yourself confused and unable to make
strategic trading decision.
Country Risks
Before you pick a currency pair to trade, you have to first
check the health and condition of the countries holding those currencies. You must
evaluate the economy and the political situation in such countries.
For instance, currency exchange rates in developing countries
are fixed to a leading currency like the dollar. This means that the country’s central
banks need to maintain enough cash reserve. If they don’t, any inadequacy in
their cash reserve can have drastic effects on forex prices.
The fix to this problem is to stick to major currency pairs
and major crosses.
Conclusion
These are just primers to the benefits and risks you may get
from currency trading. You’re trading money to earn some money, and that makes
it more important to be extra careful. Always remember to keep close tabs on
all these factors.
FSMSmart is here to provide you with the latest news updates about market trends. Never miss out on news regarding forex, commodities, consumer, financial, and technology here in FSMSmart!
