Benefits of Forex Trading: Advantages and Disadvantages Guide

2023.03.24 2023.03.24
Benefits of Forex Trading

Jana Kanehttps://www.litefinance.org/blog/authors/jana-kane/

Most investors in the modern market choose Forex trading to join the global financial world and start trading. It is also known by the initials FX, which stands for Foreign Exchange. This rapidly developing currency market is considered the most suitable for beginners in the trading world. Popular banks such as JP Morgan and UBS, as well as various financial institutions and Forex brokers, are the economic entities through which it’s possible to buy and sell currency values such as US Dollars, Euros, etc.

The Foreign Exchange market allows trading of any type of securities in various currencies depending on each trader’s investment strategy. Thanks to the great flexibility in time and market terms, FX offers many benefits and opportunities for all financial market participants in comparison with other markets. In this article, we will outline the main features of Forex markets, what are the benefits of Forex currency trading, and its possible drawbacks.

Advantages of Trading Forex

Forex currency trading has gained extreme popularity in the financial world due to its numerous benefits that led to its popularity. Below is a list the advantages of Forex trading and a brief analysis of each one that explains why this type of market is so popular.

Global Financial Market

One of the biggest advantages of the foreign exchange market is its popularity in the trading world. In the last two decades, FX has spread all over the world, becoming globally the largest financial market that is used in every corner of the globe. Approximately 195 countries are a part of the Forex market.

It is estimated that the daily transactions that take place through Forex trading platforms exceed 3.6 trillion dollars on average. That makes it globally the largest financial market with future potential for higher development and vast scalability.

Variety of Currency Pairs to Trade

The Forex market allows for choosing the currency pair to trade with. Through a wide list of choices (including trading cfds), one can buy and sell assets on other financial markets depending on their investment strategy. Some major currencies can be more easily traded than others due to their high volatility. It is estimated that there are around 128 pairs that Forex traders can choose to join the currency trading market. Below are some popular major currency pairs:

It’s Good for Beginners

FX is considered to be the best way for beginners to start their investment career and develop their trading skills. It offers great accessibility to the market since it doesn’t require a big amount as an initial deposit and has minimal risk. Moreover, most Forex platforms provide free demo accounts allowing newbies to get a taste of market movement and develop an efficient FX trading strategy. The low capital barriers, as well as no commissions on most accounts, are some of the reasons that Forex markets are picked by most hobbyist in trading.

Low Capital Barriers

In comparison with other financial markets such as stock markets, Forex currency trading doesn’t require a high amount of initial investment. A small investment can lead to high income. For example, a newbie can enter a capital of $500 and trade with a margin of 1:500. This can lead to great money profits, but also may work conversely with high potential risk and losses.

No Commissions on Most Accounts

Foreign Exchange has small or no trade commissions in a trading account. Moreover, the FX market doesn’t require centralised exchange fees on any transactions that occur, since the Forex broker can profit from the “spread”.

High Liquidity Market

Since Forex markets have such a big spread and are used by an enormous number of participants, they offer high liquidity in contrast with other markets. The Forex trading market is constantly operating, and thanks to modern technology, is accessible from anywhere. Thus, liquidity refers to the fact that anyone can buy or sell with a simple click of a button. 

Moreover, through sophisticated AI algorithms, market participants can automate and adapt their strategies depending on how the market moves, making the flexibility of investments even bigger. As a result, there is always a potential retailer waiting to buy or sell making  Forex a liquid market.

Volatility of the Forex Market

Price volatility is one of the most important factors that help decide on the next trading move. For short-term Forex traders, price volatility is crucial, since it depicts the hourly changes in an asset’s value. Moreover, swing traders use this indicator to define when is the proper time to enter or exit the market. For long-term investors when they trade Forex, the price volatility of the market is also fundamental. This is why they consider a “buy and hold” strategy may offer higher earnings after a long period.

Possibility of Hedging

Another significant advantage of Forex is hedging that can be applied to your trading account. This is an efficient method that helps either eliminate or reduce their risk of losses. When traders refer to the technique of hedging in Forex, they mean the strategical move of opening several Forex trades. 

Some may consider hedging as a high risk strategy, but the main point of this is to limit the potential losses to an acceptable amount without losing money rapidly. Most participants hedge Forex by investing in different yet related currency pairs. This way, when one currency pair goes long the other goes short, and they can balance the losses with the money gains.

You Can Trade 24 Hours a Day

An important difference between trading stocks and Forex trading is that the latter works 24 hours a day without closing. The four main directional trading sessions are divided as followed:

• The Sydney Session;

• The Tokyo Session;

• The London Session;

• The New York Session.

In the 24-hour Forex market, traders can start their account moves when the Sydney Session opens until the close of the New York Session. Also, specialists that trade Forex divide their trading into four sessions depending on the geographical area:

• Pacific Session (Sydney Session);

• The Asian Session (Tokyo Session);

• The European Session (London Session);

• The North American Session (New York Session).

Suits Varying Trading Styles

Before a new investor enters a Forex trade, he needs to define the strategy to follow in compliance with their trading styles. Depending on the time and effort, traders can be divided into categories according to their trading style. Some of them are the following:

Forex trading can be efficiently applied in any of the strategies above. Moreover, due to the Forex market’s great volume and its high liquidity, it’s possible to enter or exit the market any time.

Convenient Technology for Trading

Forex trading is a new method that was recently introduced to the market. Its decentralized nature demands continuous connectivity and adaptability. This is why a great number of developers are constantly working to improve this technology, making Forex trading platforms more suitable for modern finance demands. Thus, technological innovations help Forex trading to become even more widespread since everyone can trade from anywhere in the world.

No fixed lot size

In the Forex, there is no fixed trade lot size. Thus, it’s possible to start with any trade size. There are three types:

• Micro Lot. This type equals 1,000 units of currency.

• Mini Lot. This equals 10,000 units of currency.

• Standard Lot. This is the biggest lot and equals 100,000 units of currency.

The micro lot is commonly used by beginners and helps them have more effective risk management. Traders choose their trading size depending on the number of lots they are interested in either buying (bid price) or selling (ask price).

Well Regulated

Forex trading is a decentralized technology that functions with no central management. That’s why it is more vulnerable to fraud and other types of perilous activities such as misleading promises, excessive high risk levels, etc. Thus, Forex regulation was developed to establish an honest and ethical trading attitude. 

Moreover, a foreign Forex broker must comply with the criteria that are defined by the Forex regulator. Depending on the country where the company is, its base FX has different regulations and applications, which ensure investors that they can withdraw their money anytime, even in the event of bankruptcy. Professionals and beginners secure their funds by depositing them in other accounts separate from the brokers, so the latter cannot use foreign money for their own business.

In the list below, you will find some of the most popular FX regulators:

• Australian Securities and Investment Commission (ASIC);

• Financial Conduct Authority (FCA);

• Commodities and Futures Trading Commission (CFTC);

• Securities and Exchange Board of India (SEBI).

There Is No Central Exchange

Forex does not have a physical entity like the stock exchanges, which makes it is a remarkable example of a decentralized market. Thus, all the transactions can be made from anywhere, and since it is open 24 hours a day, it can also be done at any time of the day.

For example, if an investor is located in Europe, he can trade during North America hours and monitor the moves of the one currency he is interested in. Through the internet, FX participants can buy or sell securities using virtual funds as well as check the status of trading currencies from different dealers around the globe.

There Are Low Transaction Costs

In comparison with the stocks, Forex has very low transaction costs. This is because brokers earn their returns through “Points in Percentage” (pip). Moreover, most Forex brokers can offer a very low spread and reduce or even eliminate the trader’s costs. Investors that choose the Forex market can boost their income by avoiding fees from exchanges, deposits, and other trading activities which have additional retail transaction costs in the stock market.

Advantages and Disadvantages of Leverage in Forex

In the table below are listed the pros and cons of leverage in Forex trading:

Disadvantages of Forex Trading

There are certain risks involved in Forex trading.

Lack of Transparency

Despite the great number of advantages that Forex trading has, we should always have in mind that Forex market is based on decentralized technology. Thus, FX lacks transparency due to significant factors, which are listed below: 

• Counterparty Risks. Since FX is a global market, it is difficult to comprehend the fast changes and the different regulations of each country. Forex trading may have trading terms to protect the market participants, yet there is the risk that someone may not respect the agreed contract.

• Operational Risks. The Forex market works 24 hours without stopping. Traders cannot monitor the changes daily, so they use algorithms to protect their interests and their investments. Thus, they need to be constantly informed on how the technology works, otherwise they may face great losses during the night or on weekends.

• Leverage Risks. Forex offers high leverage. Newbies may not understand the dangers that a highly volatile Forex market may hide, and start losing money rapidly or even worse to lose all their investments in a matter of minutes.

Complex Price Determination Process

A major problem in the Forex market is the difficulty to determine the value of the currency pairs rate, which can be influenced by various factors such as global events, politics, economic stability, central banks, etc. That is the main issue that should be taken into consideration since the wrong interpretation of a chart can lead to significant losses.

High Volatility

When retail traders refer to price volatility in Forex, they mean how big the upswings and downswings of a currency pair are for a specific period. The larger those ups and downs are, the higher the price volatility. Those big changes can evoke a sense of uncertainty, and sometimes traders consider them as a chance for high profits. However, they can be proven wrong, and it may lead to uncontrolled losses. Some of the most volatile currency pairs are considered to be the following:

Conclusion

The Forex market offers a lot of privileges to any Forex trader. Once having decided to trade on foreign exchange, both experienced and newbies need to define their financial strategy and get familiar with the terms and conditions. Although Forex’s advantages outweigh its disadvantages, traders still need to be aware of the pitfalls and develop a robust risk management strategy to limit potential losses.