Foreign currency trading has many advantages which other ways of financial trading may not have. But at the same time there are risks involved too.
A smart trader needs to understand both the advantages and risks of FX trading so that he takes full advantage of the benefits and avoid risks as much as he can.
Let us go over the advantages of forex trading first and then we will go over the risks involved.
Advantages of Forex trading
Round the clock market action– Forex market operates 24 hours and thus it gives a full flexibility to the traders to trade whenever they want. Though it is closed on weekends but rest of the time it is available for all the 24 hours of the day.
Highly liquid market- Since FX market is the largest financial market in the world, it offers an excellent liquidity all the time unlike other financial trading markets. This means that the market impact is not so much and you can trade larger amounts of money relying on the high liquidity of the market.
Leverage- Leveraging facility helps you to perform higher trades even if you have a low amount of money to deposit. This amount of deposit is termed as margins. For example if you have 50:1 leverage available with your Forex broker, you can trade with an amount 50 times greater than your minimum deposit required.
Big trading opportunities– The economies of the world keep on changing and there are many factors associated with the changes. A trader can take the advantages of these fundamental changes and make good money if he performs speculation well based on these changes. There are many currencies across the world and a trader can speculate on the currency pairs with which he is comfortable with.
Disadvantages of Foreign currency trading
There are always some risks associated when you enter the world of foreign currency trading. That is to be expected with any kind of trading, actually, so the same applies to Forex trading as well.
Leverage risk – Leverage allows you to trade with higher positions using a low amount of deposit as margin. If the trade goes well you get a big profit based on your leverage ratio but it goes opposite to what you speculated, it can eat all your margin money which you deposited.
Therefore Leverage has to be played with a lot of risk management steps. You should decide the leverage ratio based on your capacity and portfolio management techniques so that you end up with minimum overall loss if things go against you.
Operational risks – Forex brokers face operational risks while Forex trading, sometimes due to the technological issues or other internal issues they may pause the operation which can prevent you from monitoring your positions with them or placing new orders required.
You and your Forex broker should always maintain some backup process while performing foreign currency trading in the event if the power or internet connection fails.