Foreign exchange, or forex, is an excellent way to make a profit quickly due to the fluctuation of the market, but it requires long hours and it’s possible to experience loss. If you’re unsure if currency trading is right for you, these pros and cons can help you decide if your portfolio can handle forex.
Pros of Currency Trading
- Low Cost: Participating in the forex market is low cost because there is no commission. Most forex brokers make a profit from the spread, or profit margins, between currencies. Overhead is eliminated, and it’s much easier to take fees into account when it comes to determining profit for a currency pair.
- Easy Accessibility: There are hundreds of forex technical indicators to draw on for short-term trades, making it easy for anyone to participate. Two of the most fundamental things a forex trader must know is how to read charts and when to buy and sell. Fundamental analysis helps traders to participate in long-term trading to increase profit.
- Varying Trading Styles: Currency trading markets run all day, which allows trades to happen at your convenience. This is helpful for short-term traders who wish to work only for a few minutes or hours per day. Additionally, there is room for someone to participate in the markets for several hours per day to conduct multiple trades throughout the days and weeks.
Cons of Currency Trading
- High Risk: It often takes high-risk to make high profits or high leverage. This means the profit/loss exposure increases, but also that forex trading can quickly turn into a loss situation. Unless the trader has knowledge of leverage, a capital allocation system, and are willing to cut their losses, an investor may see a huge drop in profits.
- High Volatility: Investors have no control over macroeconomic and geopolitical developments, which can cause issues in the foreign exchange market. If a country goes bankrupt, the currency will plummet, and traders can only watch as they lose profit.
- Self-Directed: Foreign exchange markets require a lot of self-directed and independent learning. Currency traders are on their own and have little to no assistance. Forex requires constant learning throughout your trading career to monitor patterns of a currency pair and keep an eye on all social and political affairs of a country.
- Difficult Price Determination: As mentioned before, the price of a currency is determined by a lot of factors including the social and political situation of a country as well as any economic growth that occurs. Forex rates are influenced by these factors, which make it difficult to get an accurate price for currencies. It can also be hard to draw from reliable sources to make accurate conclusions to trade on.
