Many successful self-taught investors have started with forex investing. Forex investing is a great way to test the waters and start understanding how markets work. However, people who sell forex products often prey on this audience and make them believe that trading forex is the easiest way to make money through investing, which is not actually true.
While for some, forex might be their favourite way to trade, for others, it might not be the best choice based on what they’re looking for. In this article, we’re going to give you some of the pros and cons of forex investing so you can make a more informed decision.
Pro: Forex Trading Allows you to Start for Cheap
Forex allows you to trade with very low costs. There aren’t any real commissions to pay on forex since the majority of brokers will make money off the spread between currencies in the market. So, you won’t have to worry about additional brokerage charges, which eliminates an overhead. With equity trading, commissions will play a huge role in your trading strategy and they will have a major influence on your choice of brokers.
Con: Forex Often Lacks Transparency
Forex is not the most transparent market out there. Sometimes, you’ll only get access to quotes provided by your broker. You also might not know exactly how orders are fulfilled. And in some cases, you might not actually get the best price on a particular currency. Deregulation means that brokers have the upper hand in this situation and pretty much hold all the cards.
However, this can be avoided if you’re going for a broker that is regulated by reputable regulatory bodies. Forex brokers like markets.com, for instance, are regulated by the ASIC in Australia, the CySEC for European traders, and the FCSA in South Africa. If you want to learn more about them and what they have to offer, you can check out this markets.com review from Investing Goal. You’ll also find other reviews on the Investing Goal website if you’d like to explore what other options are available.
Pro: Works with Different Trading Styles
One of the best things about the forex market is that it’s open 24 hours a day, seven days a week, and it fits different trading styles. Forex is a great option for people who want to do some short-term trading. And while the markets never stop, you can still monitor when there will be lower activity for certain currency pairs.
For example, night time in Japan is daytime on the US east coast. Traders during this period can take advantage of the lower volatility during these periods to make high volume trades while anticipating movement during on hours. Forex also allows you to go for long-term positions as well and look at long-term developments for certain currencies. This makes forex one of the most accommodating markets out there. If you don’t want to make all the investing decisions yourself you can always use a copy trading platform to make things easier.
Con: Price Determination can be Complex
A lot of people falsely think that determining currency prices is much easier in forex then with other financial instruments, but they’re wrong. Price determination with forex has to take multiple factors into consideration at once. Global economic and political market conditions can be difficult to evaluate, and most trading is done using technical analysis, which accounts for much of the volatility in the market. Getting the technical aspect wrong is the reason why many trades go south and can be highly cryptic in some cases, making forex one of the most unpredictable markets out there.
Pro: Short Selling is Easy
One point in favour of forex is how easy it is to short sell currencies on the market. Since the market sees so much volume, the chances of getting stuck on a trade at any given time are slim to none, and you’ll always be able to find a buyer or a seller at any time. This will allow you to make money whether a currency is falling or soaring.
Con: Leverage can be a Double-Edged Sword
A lot of brokers out there use leverage as a selling point, and it can be a great option for people with limited capital who want to control larger assets. But with high potential for gain also comes with a high potential for loss. And what’s worse is that while leverage trading is often marketed towards beginners, beginners are much more at risk of incurring huge losses. So, we strongly suggest that you don’t engage in leverage trading unless you have a thorough understanding of it, have a strong grip on your emotions, and know when to cut losses short, and an equally strong capital allocation scheme.
Conclusion
As you can see, while the forex may seem like a great trading option for some, it isn’t for everyone. Make sure that you weight the positives and negatives of trading in the foreign exchange market and see if it’s actually the best option for you.
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