If you’re considering forex trading online, you should consider the following benefits and risks. Check them out!
Forex Trading Benefits
If you’re sort of tight with money, forex trading can still be good for you. Why?
There are no commissions, at least not exactly. Most forex brokers make profits from the spreads between the currencies.
This means you would have to worry about separate brokerage charges. When you’re trading stocks, you have to consider different fee structures.
Different Forex Trading Styles
The forex market never stops. It runs all day like an Olympic marathon runner. That means you can trade at your convenience.
This is very advantageous for short-term traders who use strategies such as:
- Day Trading
- Position Trading
- Swing Trading
If you compare it to trading in other financial markets, forex trading lets you enjoy the benefits of much higher liquidity. This is because the forex market has the largest number of market participants.
The benefits of high liquidity also include:
- The market can efficiently fill even large orders without large price deviations.
- This makes the chances of price manipulation and price anomalies almost zero.
- There are tighter spreads, resulting in more efficient pricing.
No Central Exchange
Since the forex market is an over-the-counter market that runs all over the world, there’s no central exchange or regulator. And even though central banks do interfere sometimes, these are rarer than the appearance of a blue moon.
Volatility is Ideal
You can frequently see high price volatility, especially among major currencies. If you know how to play with it, volatility can help you nail that high-profit trade.
Pairs to Trade
You can choose from 28 major currency pairs with 8 major currencies. A trader can generally choose depending on these criteria:
- Volatility patterns
- Economic developments
If you’re friends with volatility, it would be easy for you to move from one currency pair to another.
Due to tight spreads in terms of pips, you can quickly kick off your trading career with just a small amount of upfront capital.
In other markets, having insufficient capital means you wouldn’t be able to trade successfully. These include the stock, futures, and options market.
You can also use some help from dozens or hundreds of forex technical indicators to profit from short-term trades. On the flip side, fundamental analysis can be your best buddy if you trade for the long-term.
Forex Trading Risks
Brokers dominate the forex market because of its deregulated nature. This means you are forex trading against pros and institutions.
You may not have total control of your trade order. The price you get may not be the best. To fix this, you should try to deal only with reputable and brokers that authorities regulate.
Remember: regulators have the power over brokers, even if they can’t control the market itself.
High Risks due to Leverage
You can use high leverage in the forex market. This means bigger profits—and much bigger losses. Trading can easily go out of hand and you may lose more than you ever had with leverage.
When using leverage, you should have more-than-sufficient knowledge of leverage, excellent capital allocation, and strong control over emotions.
Although we mentioned that volatility is your friend, it can also wreak havoc to your trades. If you’re investing in stocks, you can compel the company to make changes. You cannot do that in the forex market.