Foreign Exchange, Forex or FX is the world’s biggest money market. Approximately USD$1.5 trillion is traded everyday in the FX market. Investors of different categories trade in the FX market starting from an average investor to an investor who has invested a considerable amount. Brokers are one of the main participants of the foreign exchange market. It is due to them that the FX market has a continuous cash flux. Forex trading is highly unpredictable and the only factor that is constant in Forex trading is change. This is why, the FX market is considered as a very fragile market.
Just as stock exchange trading has advantages as well as disadvantages, there are several advantages and disadvantages of Forex trading too.
Advantages of Forex trading
In Forex trading usually 7 main pairs of currency are traded. Owing to enormous trading volume and global aspect of trading, currencies manifest high liquidity levels, little slippage, price stability and narrow spreads.
- Leverage is high
Forex trading offers enormous amounts of leverage. This indicates that potential profits are amplified.
- Trading round the clock
Forex traders have the option of trading at any time of the day depending on their convenience.
The chance of earning profit is same for all investors. Forex trading is an “over-the-counter” trading and all transactions take place in real time.
- Commission free trading
In Forex trading, the investors and traders who trade on a regular basis earn the entire profit amount. Currency trading gives ample opportunity for “commission free” trading.
Disadvantages of Forex trading Even though the advantages of FX trading are more than the disadvantages, there are 2 main disadvantages. They are given below.
- Round the clock trading
Although in Forex trading, a trader can trade as per his convenience at any time of the day but it is not possible for him to remain updated with the dynamic market conditions. Under such circumstances a broker is needed. A broker can be of immense help. He can keep track of the changes that are taking place in the FX market.
- High leverage
High leverage can be an advantage as well as a disadvantage in Forex trading. Just as high leverage can be an incentive to trade in the FX market; it can also become a limiting factor in earning profits. High leverage means the risk involved is also very high. Margin calls are not uncommon in the FX trading.
More and more investors as well as traders are opting for currency trading even though the Foreign Exchange market offers very limited number of currencies to trade for. The number of stocks that can be traded is more in a stock exchange.