Apart from equity and commodity market, foreign currency is another market that people use to trade and earn money increasing their wealth. Yes, Forex trading is also very popular globally with the huge volume of currency trade daily.
In forex trading the fluctuations in currency exchange rates, gives an opportunity for traders to take advantage of price change and make some profit. The currency market is different from equity and commodity trading and has its own pros and cons. Today we will talk about the advantages and disadvantages of forex trading.
What is Forex Trading?
Forex Trading is the course of action to buy and sell the currencies of different countries in the foreign exchange market. Unlike equity and commodity market, forex trading doesn't have any centralized exchange. In forex trading, all the transactions take place electronically over the counter (OTC), while equity and commodity trading take place on exchanges.
In electronic-based (OTC) trading all the transactions between the traders take place through computer networks globally. Instead of physical transactions in OTC, traders use the computer system or trading software connected to the internet.
In the international market, there are numerous participants involved in buying and selling the different types of currencies in the market. While in India, central banks (RBI), retail forex brokers, investment bankers, hedge fund houses, corporations, comprise banks, and retail investors are the leading participants in the forex trading market.
Pros and Cons of Forex Trading
In the financial market, trading is not always profitable, there are various risk factors involved. And forex trading has its benefits and risks. Hence, if you are thinking to start trading in the forex market, you should be aware of the advantages and disadvantages of forex trading that will help you avoid losses and maximize your profits.
Benefits of Forex Trading
One of the most interesting parts of forex trading is, you can trade anytime, from anywhere as it is open 24 hours. Though there are a lot of different trading hours, trading not stops globally and is open to all types of traders. However, in India, the market timing for OTC currency trades including forex derivatives is 9:00 am IST to 3:30 pm IST.
Highly Liquid Market
Owing to access to a huge number of traders globally, the forex market is one of the most highly liquid financial markets in the world. Due to the regular and large volume of trades, the liquidity in the market is also very high making forex trading a highly liquid market.
Moreover, traders have a wide range of trading options due to pairing with different currencies. Though all the currencies are not liquid, the combination of USD with other currencies is giving various options for the traders to make their positions.
High Leverages for Trading
Compare to other financial markets, forex trading gives the highest amount of leverage to traders. In the currency market, you have the opportunity to get high margins to trade many times you can say up to 20 or 30 times to trade in the market.
These high margins on your actual deposited funds also give leverage to get high profits when their trade moves in the expected direction. But make sure if there is high volatility in the market, then there are chances of abrupt movement in the currency price, hence you have to maintain the margin money to avoid penalty and book the highest profits.
Low Transaction Fees
Trading in the forex market comes with another advantage of low-cost transaction fees. Yes compared to equity and commodity markets, the transaction cost of forex trading is much lower. The reason behind the low-cost transaction is, the forex market is mainly operated by the dealers who provide the two-way quote after securing their positions to minimize the risk.
The advantage of low-cost trading is, it helps you to gain a higher profit and you can do multiple transactions with minor trade positions.
Wide Trading Options
In the forex trading market, you will get multiple options to trade into different combinations of currencies. Here you can make up to hundreds of currency pairs with the option to trade in spot and futures markets for a high-risk and high returns strategy.
In the forex market, as per your risk appetite, you can choose the right combination of the pairing of currencies. This also allows traders to take advantage of price fluctuations of different currencies of different countries as per the economic conditions and demand for the same currency for trading in the international market.
High Returns in Short Period
The main motive for investing in the financial markets is getting returns, and in forex trading, you can get the maximum returns in the shortest period. Sometimes paring the currencies gives quick returns as soon as you make the position.
Moreover, owing to the frequent fluctuations in the currency market, you can book quick profits and place multiple orders and enjoy high returns.
Disadvantages of Forex Trading
Owing to the participation of international traders, global factors including political, economic and financial make the currency price keeps fluctuating. This unstable price of currencies makes the forex market highly volatile for trading. And when Volatility Index (VIX) is high there is a chance of losses too equally making the trade highly risky.
The price of the currency of the country is affected and influenced by fundamental factors like economic factors, political scenarios, other international factors and demand and supply of the currency. Apart from this the technical indicators also encourage and decoupage traders to trade or exit from their positions. Hence the price of the currency in forex trading is very unpredictable and it can cost you if your predictions do not go in the right direction.
As we already told you forex market works round-the-clock for 24 hours, and it is not possible for every country's traders to keep an eye on their position. Here, traders square off their position as per the working hours in their country otherwise they use the algorithms to keep watching their investments and take action on their behalf. This kind of operational risk is one of the biggest disadvantages of trading in the currency market.
High Leverage-High Risk
In financial market trading high leverage can give you a high margin to get credit or borrow funds from your broker multiple times than your fund available. High leverage can give you high returns but at the same time, if the price movement of your currencies is not favourable, you can incur huge losses. Usually, traders who recently started trading in the financial market don't have any idea of the risk of taking the advantage of high leverage offered by their broker.
Lack of Transparency
The market size of forex trading is very big and it operates across the globe in several time zones. Hence, it is difficult to comprehend the changes of regulate framework of different countries. Lack of transparency in the monetary policy of several countries it is hard to monitor the related internal economic activities of all the countries. Especially the actions taken by the central banks that may affect the currency value of that country.
Why you should Start Trading Forex now?
If you are interested in forex trading you can start this trade-off journey now. As the currency of different countries always not remains the same, it keeps changing with the economic factors, foreign import-export policy and demand and supply of the currency in the market. And the fluctuation of currency prices gives an opportunity to trade and earn money.
As soon as you will start trading in the forex market, you will start understanding its basics and other terminologies. Once you start understanding the entire mechanism and how it works or how you can make money, you will enjoy trading in this market. So, what are you waiting for, start forex trading now and take advantage of unequal currency.
How to Start Forex Trading in India?
Starting forex trading is not difficult just like other financial instruments. Here you all need a trading account, a bank account and the right platform to do online trading. And to have a trading account you have to find a broker providing the forex trading services along with a trading account and online trading platform facility for retail traders.
Moneysukh is one of the leading broking houses in India, providing the forex trading facility with all the related services required for trading in the currency market. You can open the trading account here with all the essential documents required to verify your identity and address or you can say to complete the KYC instructed by the regulatory authority.
Moneysukh is also providing the one-stop solution for equity, commodity and currency trading with all the related services offering like trading account, demat account, mutual funds, ETF and advisory services with a strong research team to give the buying and selling tips with best trading strategies to the customers to generate the maximum profits.
Here at Moneysukh in forex trading, you will enjoy Ultra-fast order execution with Powerful Charting and Real-time Market Screeners and live screen to create multiple watch lists and dynamic price alerts. The booking charges are one of the lowest in the industry with a flexible pricing policy for retail customers as well as HNI clients.