There are many pros and cons associated with forex trading.
It seems that for every advantage that can surmount through the adversity faced with forex trading that there are considerable kinks in forex’s armor that can catapult a forex trader into an irreversible pitfall.
What was once supposed to serve as a fool-proof trajectory to ensuring the accomplishment of your forex trading dreams can turn into your biggest nightmare, therefore, it is critical that you acquit yourself with the pros and cons associated with forex trading.
You should know that forex trading isn’t easy and if you think it’s going to be a cakewalk then I have other news for you, the foreign exchange markets will not only chew you up and spit you out but can result in you accruing significant debt if leveraged incorrectly.
Before entering the forex market, ask yourself if the advantages outweigh the disadvantages and more importantly conduct an honest self-assessment to determine if you can financially afford losing the money you plan to invest – if the answer is yes, then congratulations and we wish you nothing but your greatest success but if not then it’s best to table the idea until a later date.
Now that we’ve covered all the preliminary tidbits of need-to-know information, let’s dive in!
Pros of Forex Trading
Decentralized Exchange
The foreign exchange market is classified as an over-the-counter market. Operating as a decentralized exchange there is no central mediatory who oversees the well-being of the foreign exchange market while history has shown us several times how a multitude of countries’ central banks have had to intervene under unprecedented circumstances which can have dire consequences with no repercussions, although this has been rare.
The advantage of a decentralized market like forex would be that it helps to keep prices low while traders can execute short positions that are otherwise banned in some countries.
Immense Liquidity
The foreign exchange market is the world’s largest financial markets that generates a daily turnover over $5.1 trillion and also has the largest volume of trading participants. The sheer volume of the FX market provides its immense liquidity while also reducing the potential of price manipulation that can sometimes be exhibited in the stock market due to less market volume and ‘large fish’ controlling the market.
Flexible Trading Styles Welcomed
The foreign exchange industry is the perfect vessel for a diverse mixing pot of traders given how the forex markets is open 24 hours per day, 7 days a week (except for retail FX traders where 24/5 investing is supported).
Short-term traders can take advantage of short-term positions while medium to long-term traders can focus on making more significant trading gains over an extended period of time.
Apart from trading intervals, the foreign exchange market is supportive of traders of all experience levels although it is widely urged that you should possess a considerable sum of trading knowledge or atleast utilize an online trading system such as the sRs Trend Rider Pro if you are a complete novice.
Simplified Barrier of Entry
There are a seemingly endless number of trading methodologies, trading approaches, technical indicators, and investment algorithms that traders can leverage into their forex trading. Not only is learning the trading mechanisms of forex trading quite simple but the number of trading resources and tools available to you are plentiful enough to keep you busy for the foreseeable future.
Affordable Costs
Coming full circle to lower costs, traders don’t necessarily have to concern themselves with the extensive fees that are commonly found with stock and option investing where equity is sometimes on the line. Oftentimes a broker’s commission is incorporated into spreads between currency pairs and considering the nature of the foreign exchange markets decentralization an increase in the competition also helps drive prices lower.
Simplified Tax Protocols
Forex trading rules are more simplified than other forms of investing.
Compared to having to differentiate between short-term and long-term trading activities, forex trading tax laws and regulations are more straightforward which significantly lessens the burden upon the trader.
Automation
Forex trading over the past decade has evolved at a rapid pace.
Where once manual trading was the only form of trading, the incorporation and wide acceptance of semi-automated and fully-automated trading strategies and systems are reigning supreme while also oftentimes outperforming manual trading methodologies. This means that trading solutions can be programmed to execute fixed trading parameters based upon certain market conditions, stop-loss and take profit levels are calculated in advance, that traders can implement their own custom trading strategies into pre-programmed solutions to have them autonomously employed on their behalf, and much more.
Cons of Forex Trading
Transparency Issues
Not all trading platforms (brokers) that offer forex trading are regulated. This means that trading with an unregulated broker may resort to price manipulation, platform slippages, and other fraudulent trading activities that leave traders with no actionable plan of recourse due to the decentralized nature of the forex markets.
High Leverage Drastically Increases Risk
Leverage can be a trader’s Holy Grail or chapter 11 bankruptcy reasoning. Leverage is offered by forex brokers, oftentimes between 50:1 to 400:1, which signifies that traders only need $1 to take a $50 or $400 trade position. While a trader can benefit significantly from leverage, losses are intensified and can result in traders losing far more money than they have invested. For this reason, it is encouraged that primarily adept traders should only consider exercising leverage unless of course, you have a strong trading mindset that will enable you to cut losses short or effective money management with capital allocation in effect.
Lack of Trading Education Providers
Finding reputable educational providers that render an educational service of value without costing a fortune is like searching for a needle in a haystack. Generally, forex traders are left to fend for themselves and learn on their own but the collective sum of misinformation that can be found on the web can produce more harm than good. Two valuable forex trading educational providers to consider would be Traders Academy Club or Divergence University.
Tremendous Volatility
If things don’t go as planned in the stock market with a particular stock, shareholders can leverage their influence upon management to adjust and make the necessary changes but with forex that is no out because there is no control over macroeconomic or unforeseen geopolitical developments. An example of this would be when Iceland had gone bankrupt which left foreign exchange traders holding Icelandic krona into a ‘powerless’ state with nothing to do but to watch.
Success Statistics Are Unfavorable
It is a well-known fact that the majority (over 70%) of retail FX traders lose money when trying to tackle the foreign exchange markets, these are humbling statistics, and as such, they demand a sort of respect for the risks that accompany forex trading.
The Bottom Line
There is a steep learning curve that must be mastered if you are looking to cultivate a successful career as a forex trader.
While forex trading can be highly stimulating, flexible for trader’s agendas, and vastly lucrative there are always risks that should be weighed in entirety.
To mold yourself into a successful trader you need to be willing to continuously learn, be able to develop a concrete trading plan or leverage powerful trading systems, accurately perceive and manage the risks, employ proper money management techniques, and exercise a considerable sum of cunning and perseverance to carve out your own path to success.
No one ever said it would be easy and if they did, they were lying or misinformed.
If forex trading still seems like the right path for you, then buckle up and get ready to have that nose to the grinding stone for as long as you can, and then some, because while the path won’t be easy it will be certainly worth it if you can defy the odds and take control of your future through forex trading.
Not sure where to begin? Reach out to Vladimir Ribakov, a successful forex trader of over 14 years and an International Certified Financial Technician, at support@vladimirribakov.com or leave us a comment below!
Tim Lanoue
Guest Author
