Foreign exchange trading, or forex, is a complex form of investing that can have lucrative returns if you know what you’re doing.
Forex trading isn’t suited for inexperienced traders or those with low risk appetite. But there are many benefits to trading in currencies. It’s important to weigh the pros and cons before deciding whether to invest in currencies.
The Benefits of Forex Trading
Forex trading offers many benefits to investors, such as:
Liquidity allows an asset to be quickly converted into cash without any price discount. In the foreign exchange market, this means that money can be moved into and out of foreign currency with little price movement.
The forex market is global, so trading is continuous as long as a market is open somewhere in the world. Trading begins when the forex Australia market opens on Sunday evening and ends after the market closes in New York on Friday. The ability to trade virtually any time and any day makes forex easily accessible.
Transaction costs are generally low with forex and built into the price. This is called the spread, which is the difference between the buying and selling price. Low-cost trading makes forex an attractive option for traders.
Forex brokerages allow traders to use leverage when trading the market. Leverage gives you the ability to trade more money than what is in your account.
For example, if you were to trade at 50:1 leverage, this means that you could trade $50 for every $1 in your account. This would give you the opportunity to potentially control a trade of $50,000 using just $1,000 of your own capital.
The Drawbacks of Forex Trading
While there are numerous benefits to forex trading, there are also many risks, or drawbacks, to consider.
Leverage in forex investing requires a small investment, which is known as a margin. Margin gives traders access to substantial trades in foreign currencies. Margin calls may occur when there’s small price fluctuations which would require you – the investor – to pay additional margin.
If you’re aggressive with leverage when market conditions are volatile, you could face substantial losses in excess of your initial investment.
Exchange Rate Risk
Exchange rate risk refers to the risk caused by changes in currency value. The risk is based on the continuous and often volatile shifts in global supply and demand balance. When a trader’s position is outstanding, it is subject to all price changes. That risk can be quite substantial and will be dependent on the market’s perception of which way the currency will move.
Less Regulatory Protection
The forex market is considered an over-the-counter market, which means that trades are not carried out on a centralized exchange. Regulatory oversight can be limited.
Because regulatory protection is limited, it’s important to go for a reputable broker such as Q8trade.net before creating an account with them. Depending on your home country, you may or may not have much legal recourse if you feel that you’ve been treated fairly by your broker.