Advantages and Disadvantages of Forex Trading


  1. Liquidity
    The Forex market is the most liquid market in the world. Due to its liquidity, the Forex
    market is a more favorable market to speculators to trade in. In addition, due to the
    liquidity factor, it doesn’t have a major problem of slippage as compared to trading over
    small equities over the stock markets or the smaller, illiquid futures contract such as
    coffee. This liquidity factor also means that orders are filled relatively quickly, allowing for
    orders to be executed at the order price. Over the past few years, spreads in the Forex
    market have narrowed significantly. Most traders focus on trading the highly liquid Majors
    where most of trading volume occurs

2. 24 Hours Trading Ability
Another advantage which the Forex market has over other markets, including stock
markets, is the fact that the Forex market allows for 24 hours trading activities. This
means that traders are able to react immediately to news of political, economic changes
throughout the world. In addition, the fact that the market operates 24 hours a day offers
opportunities to make profits and cutting losses any time of the day and most importantly,
it eliminates the problem of the gap whenever a new trading day take place over the non
24 hours markets. Because the main trading centers – London, new York, sydney, tokyo
and Frankfurt – are located over five different regions and have different time zones, a
trader has the opportunity to trade over five trading session which are overlapping. The
window of trading opportunity lies between 5pm (EST-East- ern Standard Time) Sunday
to 4.30pm (EST) Friday.

3.Trading on Margin/Leverage
When referring to margin trading, we are talking about the ability of a trader to trade
with more money than what he has in his account. In the Forex market, with just a small
margin, a trader is able to trade a much larger position than he would when trading on
the stock market. This enhanced leveraging factor allows the trader to magnify his profits
when the opportunity arises

Example: Forex brokers offer 200 to 1 leverage, which means that a $100
dollar margin deposit would enable a trader to buy or sell $20,000 worth
of currencies. Similarly, with $1000 dollars, one could trade with $200,000
dollars and so on.

The key point to remember is that trading on margin is a double edged
sword. You can lose money equally as fast as you make it.
Take a disciplined approach to your trading.

The difference between the Stock market and Forex is that margin deposit requirement is
much higher for the Stock market than for the Forex market.
As such, the dollar value of a margin trade goes further in the Forex market

4.No one can corner the market
The Forex market is such an enormous global market with so many players that no
single trader, or banks has the ability to corner the market and manipulate it to its own
advantage. Even central banks have difficulties in making any profound impact for any
extended period of time. This is unlike in the stock market – where we often hear of
speculators depressing the shares of a company by short selling.

5.Small Account Minimums
The Forex market is much easier to participate in than other markets because of the
minimal requirements to open a Forex trading account. To open a Forex trading account,
you are required to make only a small minimum deposit. This makes Forex trading
accessible to anybody who wishes to trade in the over currencies. However, do note that
not all Forex brokers offer mini accounts, though the majority do.

6.Commissions / No Commissions
Most Forex brokers do not charge commissions, but rather make money on the dealing
spread. The dealing spread is the difference between the bid and the ask quote. At
present, under normal market conditions the dealing spread over the Major currency pairs
should be no more than 3 pips.

New electronic Communication Networks (ECNs) systems are now offered by Forex
brokers. As a rule of thumb they offer a much improved spread, but at the same time the
brokers charge a commission per lot for using the ECN as your executing system. Find out
from your broker about costs associated with executing through an ECN based execution
platform, as they should offer an improved overall cost (Spread plus commissions).

7.Constant Trading Action/Opportunities
One of the biggest attractions of the Forex market is that it enables constant trading
activity. Chances are that at any given time, there is a rate movement in at least one of
the Major currency pairs based simply on the sheer volume of trading and the number of
global news events providing a vehicle to volatility, while offering endless opportunities to
the trader.

8.Short Selling Without Any Restrictions
In the stock market there are several regulatory restrictions imposed on short selling,
making it hard – or in some cases, even illegal – for small traders to participate in short
selling. In Forex trading there is nothing of the sort, since it is just as easy to take a short
position as it is to take a long position

Disadvantages of Forex Trading

1.No Central Exchange:
One of the main weaknesses to Forex trading is in the lack of a central exchange mechanism
in which trades take place. As such, each market maker in the Forex market serves
as a private exchange, Some traders find comfort in knowing that there is a regulated
mechanism backing their market participation. Others prefer to trade over ECN systems,
having the broker not serving as a market maker. In addition, the lack of a centralized data
point means that the spot Forex market does not have all the add-ons, such as trading
volume information like in the case of the stocks and futures.

2.Two Economies to Every Trade
By its very nature, there are always two country’s currencies to each Forex trading position
because currencies are quoted in terms of their value against each other. That means for
any given exchange rate there are two countries (or regions) to take into consideration.
Sometimes issues related to one of the countries will dominate, while sometimes the
other will. It can be quite unpredictable in that regard, which can sometimes lead to quite
confusing reactions to news and events.

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