It’s easy to see why anyone would be attracted by the idea of a forex trading career, especially with an estimated $6.6 trillion traded globally every single day on the foreign exchange.
However, while there are numerous benefits to trading forex, there are also a number of potential pitfalls that will need to be considered if you’re to make an informed decision.
So, what exactly are the pros and cons of a forex trading career? Here’s our brief guide:
The Pros of Forex Trading
Let’s get started with the pros of forex trading, so that you can understand the potential opportunities within the marketplace.
1. Increased Leverage
Leverage refers to the process of taking on debt (or margin), with a view to opening and controlling trading positions that are considerably larger than the value of your deposit.
Reputable brokers can offer leverage of up to 100:1, enabling you to control disproportionately large trading positions and potentially pursue more significant returns over time.
This certainly makes the market more accessible for novice or part-time traders, although there’s also the potential to lose considerably more than your initial deposit.
2. High Liquidity
The forex market is the largest entity globally by volume, with this creating ample liquidity for trading (particularly in the case of the seven major currency pairings that account for 68% of total forex trades).
Liquidity refers to the east with which investors can buy and sell assets, with inflated levels lending themselves to practices such as short-selling and scalping (where a high volume of orders are executed during a 24-hour period).
This is a huge advantage in terms of flexibility, although it should be noted that liquidity levels are considerably lower for minor and exotic pairings.
3. Less Potential for Insider Price Manipulation
While assets such as stocks, bonds and even commodities can be heavily influenced by private information, which may be held exclusively by insiders and key stakeholders.
However, the same is not true in the forex market, which is far less centralised and more vulnerable to publicly accessible information such as economic data and monetary policy releases.
This creates a genuinely transparent marketplace, and one that’s appealing to both retail and institutional investors alike.
The Cons of Forex Trading
While some may consider the risk posed by leverage as a potential downfall of forex traders, there are other things to keep in mind as a cautious trader. For example:
1. Heightened Volatility
While all financial markets are volatile, few boast the same levels of volatility as the foreign exchange.
While this can be leveraged by scalpers and day traders to optimise daily profits, consistent price fluctuations can also undermine trades and provide a significant challenge to risk-averse investors.
This volatility can increase during the busiest trading periods, so it’s important to keep this in mind as part of your overall strategy.
2. A Lack of Regulatory Protection
In simple terms, the foreign exchange is an over-the-counter market, which means that trades are not carried out on a centralised exchange.
Although this offers advantages in terms of market manipulation, it also hints at a lack of regulatory oversight and standardised protections across the global industry.
So, there’s an onus on traders to perform due-diligence when investigating the reputation of individual brokers and deciding which platform to utilise.
3. There are Fewer Residual Returns
Stocks and bonds are renowned for delivering regular dividends and scheduled interest payments, which can enhance the long-term value of buying an asset.
However, forex trading is primarily focused on obtaining capital gains from the appreciation of one of two currencies in a particular pair, ao there are far fewer residual returns on offer.
There are exceptions to this rule, however, as longer-term forex positions that are held overnight can yield interest (depending on the difference in interest rates practiced in the relevant countries).