Forex Trading - Advantages and Disadvantages

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Forex Trading - Advantages and Disadvantages

Forex Trading - Advantages and Disadvantages

What is Forex Trading?

Forex, or Foreign Exchange, is the simultaneous exchange of one country's currency for that of another. This market of exchange has more daily volume, both buyers and sellers, than any other in the world. Taking place in the major financial institutions across the globe, the forex market is open 24-hours a day.

Currencies are quoted in pairs. The first listed currency is known as the base currency, while the second is called the counter or quote currency. In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a point or a pip.

The forex market is one of the most popular markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available.

Advantages of forex trading

Leverage. Huge leverage is available in Forex trading, often up to 100:1 meaning that large profits can be generated from small margin deposits.

Liquidity. The enormous size and global trading of the forex markets means that the markets in the major currency pairs are very liquid making trade executions almost instant with little slippage.

Ability to go short. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. This means a trader has equal potential to profit in a rising or falling market.

Trends. Fundamentally, the value of a country's currency is determined by interest rates and the strength of the economy in relation to other countries. Currencies, therefore, have a greater tendency to trend until the fundamentals change.

Disadvantages of forex trading

Leverage. With huge leverage available to forex traders the danger is that positions which carry too much risk for the account size can be taken on, leading to margin calls. Effective money management rules must be adhered to.

Brokers. Retail traders must use a broker rather than dealing directly in the interbank market. The broker will be the counterparty in all transactions and is, effectively, making the market. They can, therefore, widen spreads or even refuse to trade during volatile trading conditions. To avoid dealing with brokers an alternative to forex is to use futures. See online futures trading for more details.

Spreads. As the retail trader must use a broker to trade, they cannot deal at the interbank rates. A broker will generally quote a fixed spread of 3-20 pips depending on the currency pair. The underlying interbank rate might be as little as 1 pip.

Forex is a very large market but for most retail traders dealing with brokers the odds are shifted against them. Online futures trading provides a much more level playing field for most traders who want to take part in forex trading.

Tim Wreford operates Online Futures Trading, a website that provides information and resources for traders. Tim also provides an article detailing the development of a day trading system, the results of which are updated daily on the site.

In The News:

Free Guide to Trading Forex during Volatile Times
Sacramento Bee
By City Index Australia The recent falls in commodity currencies, including the Australian dollar, show how volatility in global markets could present trading opportunities for forex traders. For example, the Aussie dollar (AUD) was trading as high as ...
How to Start Trading Forex: Free Beginners GuideEinnews Portugal
OPTIONS PLAY: USD INDEX FUTURES TRENDINGInside Futures

all 22 news articles »

Vantage FX UK Launches New Bloomberg TV Campaign
SYS-CON Media (press release)
The adverts are due to air on financial news network Bloomberg and will promote the exceptional level of personal support offered by the London-based Forex trading dealer. In the commercials Mr Berkeley states: "At Vantage FX we strive to deliver a ...

and more »

ZuluTrade's Social Forex Autotrading Platform Now Available to ACFX's Clients
MarketWatch (press release)
NEW YORK, May 23, 2012 (BUSINESS WIRE) -- ZuluTrade.com, the largest automated social Forex trading platform, which enables users to follow successful traders' performance, announced today their partnership with ACFX, the Forex brokerage arm of the ...

and more »

Forex Trading Tips for Investors in the Global Currency Markets
MarketWatch (press release)
SINGAPORE, May 23, 2012 /PRNewswire via COMTEX/ -- Forex Trading offers various benefits from tighter fixed FX spreads to greater leverage and substantial gains from small movements in the market. Foreign exchange (Forex, or FX) is one of the most ...

and more »

China banks report monthly net forex selling in April
Reuters
BEIJING, May 24 (Reuters) - Chinese banks sold more foreign currency than they bought for clients in April, leading to a net sale of $3.7 billion in foreign exchange in over-the-counter transactions, figures from the State Administration of Foreign ...

and more »

Big Players Dominate FX
Traders Magazine
The Bank for International Settlements offers the most comprehensive view into the FX market and comes out with a highly anticipated report every three years. The last Triennial Central Bank Survey came out in December 2010. FX trading represented a $4 ...

Palm Beach Post
FOREX-Euro weak near 2-yr lows on dire German data
Reuters
The euro dropped sharply to $1.25155 on trading platform EBS, its lowest level since July 2010, before recovering to trade at $1.2575 as some investors booked profits on bearish positions initiated earlier. But any rebound was likely to be fleeting and ...
Euro Drubbing Continues; Currency At New 22-Month LowWall Street Journal
Greece remains dominant in currency marketsFX-MM
Skepticism over EU breakthrough hits marketsSeattle Post Intelligencer
Palm Beach Post
all 6,479 news articles »

Euro, Risky Assets Look To Eurozone PMI And German IFO For Direction
TheStreet.com
By Doug Kass The major currencies consolidated in quiet overnight trade as markets digested volatility over the preceding 24 hours before a busy day of European economic data offers new catalysts. The preliminary set of May's Eurozone PMI figures is in ...

and more »

Phones Review
Try a New Approach to Forex Trading With Vantage FX UK
MarketWatch (press release)
LONDON, UNITED KINGDOM, May 21, 2012 (MARKETWIRE via COMTEX) -- For MetaTrader 4 traders seeking the ideal Expert Advisor to automate part or all of their Forex trading process, Vantage FX UK ( http://www.vantagefx.co.uk/ ) has the solution.
GO Markets Achieves Record Gains with Launch of CFDs & Pro Trading AccountsWebWire (press release)
Why MetaTrader is the Best Trading SoftwarePhones Review

all 8 news articles »

RMB Goes Live With TraderTools' FX Trading Platform
MarketWatch (press release)
NEW YORK, May 22, 2012 /PRNewswire via COMTEX/ -- TraderTools Inc. (TraderTools), which provides the only complete, integrated FX trading platform available on the market, announced today that Rand Merchant Bank, one of the leading investment banks in ...

and more »

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