Many newcomers to forex trading are either beginner traders or traders who are transitioning from traditional stocks trading to Forex trading. These individuals are always inquire about the advantages and disadvantages of trading Forex.
For people who are just learning about the Forex Market, we recommend reading our previous blog article How to Get Started Trading Forex, to get a general idea of what you’re getting into. You’ll find a few actionable items where you’ll be able to get valuable insight on how Forex trading works before losing a single dollar to the markets.
Assuming you now have some knowledge about forex trading, the million dollar question is: What are the Pros and Cons of Trading in the Forex Market?
There are countless of pros and cons, too many to count. So in this article, we’ll be focusing only on the main Advantages and Disadvantages of Forex Trading.
The Advantages of Trading Forex
- The Forex Market is the single largest and most liquid financial market in the entire world, with over 5 trillion dollars moved per day. What does this mean for retail traders? The markets MOVE, and can move quickly. This can be good or bad depending on how experienced a day trader is. What this does means is that it’s suitable for those looking to day trade, actively looking to buy and sell assets.
The market is open 24 hours of the day, unlike the stock market. On average, the spreads are tighter in Forex trading, and the transaction costs are lower compared to trading stocks. Trading Forex is great for those reasons, and for freedom in trading and enjoy the ability to open and close trades without too much concern for additional fees.
- You don’t have to worry about scandals or bad PR ruining your trading positions or portfolio in Forex trading. Whereas, in traditional stock trading, rumors about the CEO’s questionable actions may tank a company stock. Have you ever heard of the company Euron or WorldCom? These companies left investors broke and out of luck because of their respective scandals.
When it comes to forex trading, a currency’s strength and reputation is backed by an entire nation. Although, there were cases like Swiss Flash Crash, such as events happen every blue moon. On a daily basis, some big time CEO is being investigated for alleged crimes and their stock plummets. Rarely, is that the case for currencies. A currency does operate on fundamental and technical basis as do stocks, however there is less uncertainty on the fundamental side of currencies.
- Trading Forex has the advantage of a lower barrier to entry. You don’t necessarily require a large amount of capital to start trading forex. Whereas in traditional equity markets, you could pay up to a few hundred dollars for a single stock, and they may only rise and fall by a few dollars within long periods of time.
On average most stock traders need anywhere from $3,000 to $25,000 to start trading, depending on broker they use and/or their country’s regulations. One can start trading Forex with as little as $50 (although this isn’t ideal). This is mostly possible due to how much leverage Forex brokers are able to provide compared to Stock trading brokers. Leverage for stock trading rarely exceeds 1:25, while leverage in Forex trading can go as high as 1:1000. This can be seen as a double edge sword, but can be quite advantageous if the trader incorporates proper risk management.
The Disadvantages of Trading Forex
- One major disadvantage of trading Forex as opposed to Stock trading is that it attracts a lot of scammers and dishonest individuals, even companies who are looking to make a quick buck off new retail traders in the industry or “fresh blood”. So before you hand your money to any company and/or individual, do your due diligence and research them thoroughly before investing any money. Make sure they have your best interest in mind.
- Another disadvantage of trading forex is the abusement of leverage. New forex traders quickly about how easily they can make profits and learn just as quick how easily they can blow their trading account. We’ve all seen it, someone doubles their $1,000 account within a week, only to end up losing it all the week after. Unexperienced forex traders abuse the leverage that their broker provides by either executing way too many trades or entering lot sizes outside of what is ideal for their equity, also known as poor risk management.
- Last but not least, trading in the forex market is a disadvantage because it’s decentralized. This means that there is no central exchange for it, as everything is done over the counter (OTC). Major banks and financial institutions will step in during extreme conditions, but that is rare. You are potentially trading against your broker. This is why it’s key to only open accounts with regulated and trustworthy forex brokers to avoid any market manipulation on their end.
These are just a few advantages and disadvantages of Forex vs. Stock trading. There are many others, but we believe these are the main ones to know about. Although both financial markets have their differences, they both require a lot of what we talk about on this article. Give both markets a shot, and choose one that fits your personality or whichever makes you consistent profits.
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