Forex has become a center of attraction for national banks, major corporations, financial industry giants, and even private traders with minimal capital. Among the big players worth highlighting are: Goldman Sachs, Deutsche Bank, HSBC Holdings plc, and Barclays. This multi-billion dollar market provides opportunities to electronically buy/sell currency pairs 24 hours a day, 7 days a week, without interruption.
Forex remains decentralized, there is no single regulatory body. Each country sets its criteria for authorization and limits for operating in its jurisdiction.
The Bank for International Settlements (BIS) has conducted a study and identified certain trends:
- The main centers where most transactions occur are the UK, US, Singapore, Hong Kong, and Japan up to 78% of all transactions.
- Currency turnover peaked in 2022 at $7.5 trillion per day, in 2019 it was $6.6 trillion.
- The US dollar was involved in 88% of all transactions in 2019, the euro in 31% and the yen in 17%.
- Currency turnover increased gradually from 2004-2022, on average by 20-30%, from $4 trillion to $7.5 trillion.
The main group of forex traders 27% are 18-34 year olds. Forex is accessible to a wide audience even with micro-investments from $5-10, but its unstable nature and volatility can negatively affect the participant’s account balance. Statistics indicate that only 15% of traders make a profit.
Before entering the market, you should analyze all the pros and cons of forex trading to understand the essence and principles of the entire system. The market offers tools for achieving great success, but at the same time, the risks for the invested capital are growing.
Pros Of Forex Trading
The data showed that more than 10 million traders are registered on the market. For beginners, trading starts with choosing a broker and registering an account (demo or trading account). Players benefit from forex trading by opening long or short positions. The main pairs that traders follow are EUR/USD or USD/JPY. The amount of profit always depends on the volume of the transaction itself. Although this is a risky type of earning, it has several advantages:
Unhindered access to the market
Forex has become extremely popular among traders because there is no entry threshold, even with a minimum capital of $5-10 you can conduct operations. There are also no requirements for specialization, lack of financial education is not an obstacle to working in the market. Participants can choose their time zone, from Tokyo to New York, trading is uninterrupted 24 hours. The forex trading benefits include a wide range of currencies (170 items), including cryptocurrencies.
Hypothesis testing
It is better to test any strategy, especially for beginners, using a demo account. Studies show that 70% of trades are made using a live account, while the remaining 30% are made using a demo account. About 41% of traders make an average of 9 to 20 trades each month. Wanting to use leverage to significantly increase profits is a dangerous path. Thoughtful and properly assessed forex trading benefits and risks give good account growth.
Access to additional capital
Leverage is a good tool that allows you to trade and risk a larger amount than you have on deposit. It can be referred to forex trading pros and cons at the same time.
Statistics say that the average single deposit of a participant reaches $1220. Those who have a small capital with the help of leverage can increase it by 1000 times. But, in certain jurisdictions, to protect players from large risks, regulators have introduced restrictions for the ratio of leverage to deposit:
- US – 50:1 (major pairs), 20:1 (minor pairs).
- EU – 30:1 (large companies), 20:1 (for small businesses).
Although applying leverage can achieve great results, one should not forget about risks. Most traders prefer to risk less than 5% of their capital.
Fast return on investment
The market of several trillion dollars allows any player to open and close a position in a few seconds. Quick return of capital with profit (sometimes very significant) plays only to the advantage of the market, the number of those willing to enter this market increases several times every year. About 45% of investors devote 1-2 hours a day to trading, while 14% already spend more than 6 hours. One of the disadvantages of forex trading in this process is the commission to the broker.
Opening any position
Forex pros should be attributed to the absence of any restrictions for opening short positions, as happens in the stock market. When buying or selling, both long and short positions are opened at the same time. A trader buys one currency and at the same moment sells another. There are several types of analysis, charts, and technical tools to determine the strategy, which currency pair to use, and how long to keep the deal open. Up to 66% of traders turn to daily charts.
Freedom and speed in exchange
The high liquidity of Forex is one of its main criteria. Every day, several million traders take part in trading, and they can easily buy or sell a selected currency pair without significant influence on its price. Only global events, catastrophes, or a sharp change in the economic course of one of the countries can affect the sharp price hikes. Among the pros and cons of trading, high liquidity is a definite advantage.
No influence of insider information
The large volume of trading, more than $6-7 trillion with a community of many millions, has provided this market with transparency and protection from manipulation. Only central bankers can know any information about currency movements, and interest rate changes, but even with such information, it has little impact on the market. Big players, such as investment funds, and financial corporations also do not have a significant impact on the movement of currencies. Only national banks can rarely enter the market to regulate significant jumps in their currencies.
Minimal costs
Commissions and fees are charged according to the agreements with the broker. Usually, brokers put all information about costs on their website, as well as indicate when signing contracts with a trader. The broker’s profit is the currency spread. If there are operations with the main currency pairs, where the spread is narrow, the costs will be minimal. Usually, the costs increase when working with exotic pairs, where the spread is wide. There are no additional hidden fees, or commissions as in the stock market.
Simplified tax accounting
If a broker has the status of a tax agent, the tax deduction is carried out automatically. If there is no such status, the trader is subject to the rules of local legislation.
Trading strategy automation
To facilitate the trader’s work there are automated systems. On the platform, you can customize/set certain values for making transactions (stop loss size, making transactions only at a certain price). Trading takes place around the clock, it is very difficult to keep track of all the changes, so the automation of the process greatly accelerates and facilitates all the processes in the market.
Works around the clock
Forex gives the trader a choice of when, at what time of day and night, to enter the market. Some participants prefer to work in London time as the UK is considered the center of online trading with 280,000 traders. Others are interested in trading the Japanese yen or Singapore dollar and entering the market on Eastern time.
Low entry costs
Costs include making a deposit, which can start with minimal amounts (using leverage to increase several times), and commission is paid from spreads.
Others
Brokers give the right to choose from several types of accounts (from standard, and demo to PAMM, and MAM accounts), according to the player’s preferences.
Also, there is a wide choice of trading platforms for traders, brokers tend to offer additional bonuses to attract new participants and start trading.
Automated systems of trader’s work are becoming more perfect and accurate every day, many already use modern technology, AI algorithms. There are a lot of platforms, and programs with various additional functions on the market, which facilitate the trader’s choice.
Cons of Forex Trading
Getting financial profit on Forex is always associated with the risk of losing money, because you can make a mistake in the choice of strategy, not take into account the factor that influenced a sharp jump in price, forget to set a stop-loss, etc.
It is important for a trader to know about the disadvantages and take them into account in further practice:
The market of professionals
Retail Forex trading, trading in which private investors participate, reaches only 5.5% of the total market turnover. Large companies such as Union Bank of Switzerland, Standard Chartered Bank, Citibank, national banks, and investment funds spend the bulk of the $7 trillion. After all, they have many more resources than a private investor, at their disposal are more expensive analytical technologies, systems, and the necessary information.
World events
Global political changes, changes in the economic direction of countries, adoption of strict regulations and rules, catastrophes, and cataclysms can have an impact on price spikes and loss of investments. One of the ways to manage these types of risks is to choose several currency pairs and follow the events, the development of the financial situation, and international relations in these countries.
The unregulated nature of the market
Forex is a global over-the-counter currency market that has no centralized management/exchange/regulator. For a private trader, it means the need to be careful when choosing a broker, and its reputation in the market, and study the terms of cooperation when signing contracts with it. It is also worth studying the legislation of the jurisdiction where the broker operates to understand where to turn in case of violation of agreements. Some countries have created special Regulators, such as the Commodity Futures Trading Commission (CFTC) in the USA, the FCA in the UK, and the Cyprus Securities and Exchange Commission (CySEC). Their main task is to monitor the activities of brokers, issue licenses to them, and control compliance with all legal regulations, in these jurisdictions traders and their investments are protected by local legislation.
Uncertain impact on the exchange rate
In the stock market, the price is determined by the company’s financial statements, development prospects, and the potential for expanding cooperation with other corporations. The price for a currency pair on Forex can jump due to a completely unobvious factor. In addition, private traders do not have access to information that affects changes in exchange rates.
High risk of loss
Leverage is a tool with which you can significantly increase the amount of profit, but at the same time the risk of losing all the capital increases. This is especially true for beginners who want to make quick money and use leverage of 1000:1. The standard leverage is 50:1, when you have only $1 you can make a transaction for $50. This amount of leverage limits the trader in his probable losses.
Instability
Forex is a dynamic market, the volatility of which plays both in favor of players and in disadvantage. Of course, you can earn a good income playing on the difference in exchange rates but also suffer losses if the rate of the pair does not meet the hopes of the trader. Setting stop-losses and take-profit will protect you from losing your entire deposit.
Self-control and endurance are required
It is especially difficult for a beginner to get used to the variability and speed of the market, the functionality of the platform, and the amount of information. To test any strategy, especially with the use of large sums, a demo account is an excellent tool. It is better to start with small amounts and get used to the peculiarities of Forex trading gradually. In this way is formed stamina and discipline, so as not to give in to a momentary impulse.
Others
Trading takes place 24 hours, it is difficult and simply impossible to keep track of all the news, and changes and react immediately. Traders do not have the resources like big companies to react to rate fluctuations around the clock. Private investors have to buy automated systems to protect their investments by setting certain parameters in operations.
Working with Forex is a constant training in technical and fundamental analysis, webinars, and training to assess market dynamics, and risks and develop new strategies.
Summary
Forex is a unique deregulated financial market that provides entry conditions for huge corporations as well as private investors with minimal starting capital. Affordability, liquidity, and additional funds in trading accounts are undoubtedly the advantages of this system. But large profits are always associated with high risks of losses. Forex is dynamics, changes in trends, and volatility of exchange rates. It is constantly necessary to monitor the news, so as not to miss opportunities. Also, do not miss geopolitical events, changes in interest rates by central banks, and economic events in the country whose currency the trader trades. This system requires continuous training, endurance, and discipline, just like all financial markets.