Foreign exchange, also known as forex trading, involves converting one currency into another. It is safe to say that the world revolves around money, making currency one of its most important factors. Import, export, and foreign trades all rely on the currency trade exchange.
While forex trading benefits the general economy of a country, individual traders can also invest in forex trading to make extra cash. However, forex trading is not for the faint-hearted. This is because forex trading usually involves a lot of risk-taking, and it demands that you be able to maintain trust even in uncertain situations.
However, before venturing into forex trading, it is always advisable to understand the advantages, disadvantages, and forex trading risks. In this beginner’s guide to forex trading, we will look at some of these advantages and disadvantages.
Advantages Of Forex Trading
1. Control
One of the most significant advantages of forex trading is that it gives an individual trader all the control when it comes to making his trade. The final decision of whether to make a trade and the amount of risk to be taken are all made by the trader. In forex trading, no one should pressure anyone to enter into transactions that they don’t want.
2. Flexibility
Since forex trading operates on a global market where all currencies worldwide are traded, traders are not constrained or limited on the amount of cash to use in a trade. This offers a lot of flexibility to traders and business people regarding what goods or services to trade.
The forex trading market also runs on a 24/7 hourly basis with limited rules and regulations, making it attractive for full-time and part-time traders.
3. Sensible Cost
Compared to other investments, forex trading not only offers various options, but it is also a low-cost investment. Its low-cost assets are attributed to the direct involvement of traders, eliminating the high presence of brokers.
4. Various Trading Pairs
The eight major currencies used in forex trading form at least 28 major currency pairs; choosing the best pair to trade with should be influenced by factors such as; volatility patterns, suitable timing, and economic developments.
For those traders who enjoy currency volatility can quickly shift from one money pair to another.
Disadvantages of Forex Trading
1. Value Determination Method
Factors such as politics, economic influence, and news posts usually affect the forex market, making the price determination process somewhat complicated.
2. Risk Factor
The forex trading market is usually ridden with risk factors. One of the significant risks in forex trading is leverage. The higher the leverage, the higher the risk involved. Leverage is the means through which an individual trader gains exposure to vast amounts of money without necessarily having to pay the full worth of his trade upfront.
Not being able to predict the rate correctly and the currency price that will give higher profits can lead to massive losses. To avoid such losses, a trader needs to be very attentive and conversant with the currency trading market to make precise and profitable future predictions.
3. Self-Learning
Unlike in the stock market, where a trader can seek expert help from trade advisors, relationship managers, and portfolio managers, traders in forex exchange are entirely left to learn independently with little or no assistance. This has led many novice forex traders to quit during the initial phase due to amounts of losses that they incur due to having limited knowledge on forex trading.
4. Transparency
Since the currency trading market usually has limited rules and regulations and is controlled by brokers, it can lead to a lack of transparency. Some of the ways that clarity can be hindered includes;
• A trader not having control over how his trade orders are fulfilled
• A trader getting partial opinions on the trading quotes provided by his broker
• Traders not getting the best price.
However, the issue of transparency can be dealt with by dealing with regulated brokers only when doing FX trading.
Conclusion
Though not exhaustive, the discussed pros and cons of forex trading should guide you into deciding whether to invest in forex trading or not.
