Forex is the largest as well as the most liquid market in the world. It is not surprising that many people ask themselves if becoming a forex trader is worth it. Owing to its high volatility, 24/7 schedule, and easy accessibility it has emerged as a popular career, especially for people with a financial background. Nonetheless, forex trading has its disadvantages, such as high risk as well as volatility.
With the right mindset and consistent strategy, becoming a trader is worth it for many reasons. First of all, the market is easily accessible, and one can start trading with as little as $100. It can have very low costs (brokerage and commissions). There are no commissions in a real sense-most traders make profits from the spreads between forex currencies.
A trader doesn’t have to worry about including separate brokerage charges, eliminating an overhead. Compare that to equity or other securities trading where the brokerage structure varies widely and traders must take such fees into account.
The forex markets run all day, enabling trades at the trader’s convenience, which is very advantageous to short-term traders who tend to take positions over short durations. For instance, Australia’s daytime is the nighttime for the East Coast of the U.S. A trader based in the U.S. may trade AUD during U.S. business hours.
During that period of time, a little development is likely and prices are in a stable range during such off-hours for AUD. Such traders adopt high-volume as well as low-profit trading strategies, as traders attempt to make profits on relatively stable low volatility duration. They want to compensate with high volume trades. Traders can also take long-term positions which can last from days to a couple of weeks.
Forex trading and other advantages
Let’s look at other advantages as well. Compared with other financial markets, the forex market has the largest number of market participants. This provides the highest level of liquidity, which means even large orders of currency trades are easily filled effectively without any large price deviations. This eliminates the possibility of price manipulation as well as price anomalies, thereby enabling tighter spreads that lead to more efficient pricing.
There is no need to worry about the high volatility during opening and closing hours, or stagnant price ranges during the afternoons, which are trademarks of equity markets. Unless main events are expected, traders can observe similar price patterns throughout the non-stop trading.
There is no central exchange or regulator when it comes to the forex market. Various countries’ central banks occasionally interfere as needed but such cares are quite rare. Most such scenarios are already perceived and priced into the market. Such a decentralized, as well as deregulated market, helps avoid any sudden surprises.
Such deregulation is also useful when it comes to costs, as deregulation helps to keep costs low. Orders are directly placed with brokers who execute it on their own. Another positive side of deregulated markets is the ability to take short positions.
Furthermore, the main currencies frequently display high price swings. If trades are placed smartly, volatility assists in enormous profit-making opportunities.
Numerous currency pairs and low capital requirements
Let’s discuss the main currency pairs. There are 28 main currency pairs, including eight major currencies. Criteria for choosing a pair can be convenient timing, volatility patterns, etc. A trader who loves volatility can easily switch from one currency pair to another.
Due to tight spreads in terms of pips, people can easily start trading with a small amount of initial capital. Without more capital, it may not be feasible to trade in other markets like equity, futures, or options. Availability of margin trading with a high leverage factor comes as the icing on the cake for trades. While trading on such high margins comes with certain risk factors, it also makes it easier to get better profit potential with limited capital.
Main disadvantages
Forex trading comes with many advantages, there are certain disadvantages as well. For example, due to the deregulated nature of the market dominated by brokers, one actually trades against professionals. Being broker-driven means that the market may not be fully transparent. They may not have any control over the fulfillment of their trade order. Traders may not get the best price or may get limited views on trading quotes as provided only by their selected broker.
A simple solution is to work only with regulated brokers who fall within the purview of broker regulators. The market may not be under the control of the regulators, nonetheless, the activities of brokers are.
Multiple factors have the potential to influence rates and it can be difficult to analyze information. Most trading happens on technical indicators, which is the primary reason for the high volatility in such markets.
Another issue is the high leverage. The trading is available on high leverage, meaning one can get profit/loss exposure multiple times of the trading capital. Markets allow leverage of 50:1, so traders need to have only $1 to take a position worth $50. Trading can easily turn into a loss-making nightmare unless traders have a robust knowledge of leverage. It is also important to have an efficient capital allocation scheme and strong control over emotions.
What else?
In the stock market, traders can seek professional assistance from portfolio managers, trade advisors, and others. In the case of forex, traders are completely on their own with little or no assistance. Disciplined, as well as continuous self-directed learning, is a must throughout the trading career. Most beginners quit during the initial phase, as they suffer losses due to limited knowledge and improper trading.
With no control over various factors, traders can easily suffer huge losses in the highly volatile market. Moreover, the 24/7 market makes it difficult to regularly monitor prices and volatility. The best approach is to keep strict stop losses for all trades and trade systematically through a well-planned approach.
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