Pros and Cons of Forex Trading

Forex trading is one of the financial market investments available to traders. However, it is a unique form of investment which makes it advantageous to trade, but also comes with an increased risk profile. So what are the pros and cons of forex trading? Let’s start with the pros.

PROS

Forex trading is one of the few investments which the trader can use in becoming rich. There are several people who have become rich trading forex for a living, or using investment in forex as part of their growth investment portfolio. Examples abound in the persons of George Soros, Warren Buffett, etc.

Forex trading is an investment that the trader can actually control. The trader or a designated account manager decides when to trade, what to trade and if to trade at all. Even the strategy of trading is something that can be controlled by the person trading the account. This is unlike other investment vehicles such as real estate and offline investments where a lot of variables are out of the control of the trader. Part of the problems those who had their homes foreclosed in the US real estate bubble had was that they were unable to get their homes sold at prices that were favourable before the bubble burst. In forex, a trader can actually monitor an active trade and decide when to cut losses, when to capture profits with a trailing stop, or how to get out of strangulating positions early.

trading capital

The forex market is the most liquid market on earth. A trader can get into the market and out of the market literally in seconds. This market liquidity ensures that traders get good fills, and have opportunities at their fingertips that they would not ordinarily have elsewhere.

Another advantage the forex market has going for it is the ability to profit in a bi-directional fashion. Traders can profit from forex if the value of a currency is going up (using a long order) or if it is falling (using a short order). In other financial markets, short orders are either heavily restricted or banned entirely. During the height of the global financial crisis when markets were in free fall, short selling was banned in the US and many countries to prevent traders benefitting from market rumours. No such restrictions were placed in the forex market, and traders were able to benefit from some sustained currency downtrends.

The development of social trading networks which allows inexperienced traders to track and follow the moves of other more experienced and profitable traders is one of the developments that has upped the profile of the forex market in recent times. This is one feature that allows those who want to shorten the learning curve in forex to profit from it.

CONS

Just like a kitchen knife is a very good implement when put to culinary uses, so also it can serve as a murder weapon. The forex market is just like that. It can be wonderful thing when the money is pouring in, but it can also be a devastating tool when put in the wrong hands. The fast-paced, highly leveraged nature of the forex market means that anyone operating in this market is operating at risk levels that are not seen in other markets. Leverage, no matter how small, magnifies the risk in the market. The fast-paced nature of forex means that it is actually possible for entire investments to disappear.

In terms of suitability for certain categories of people, forex is not suitable for beginners or for those who are in retirement and who require a more stable, less risky form of investment. The risk profile of the forex market does not make it safe or suitable for those who at a point in their lives, cannot develop a profile to accommodate such risks.

Unlike full-access stock trading where traders are assigned stock market advisors, a forex trader will usually be on his own. A certain degree of learning and experience has to be obtained in order to trade the forex market profitably. Even at that, the first few attempts at trading are not usually successful, and those who cannot endure may quit the market altogether.

In terms of profit, the forex market is better suited to those who have reasonable capital, or those who have the patience to compound whatever small capital they have into bigger accounts. It takes the same effort to trade a smaller account as it does to trade a bigger account. In forex, there are no advantages with trading with a small account except as part of the start of a trading career where it is advantageous to learn the ropes before striking out big.

Conclusion

These are the pros and cons of forex trading. However success depends of capitalizing fully on the pros, and reducing exposure to the negative aspects of forex trading.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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