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Weighing the foreign exchange market’s advantages and disadvantages

We can say that forex has been widely used and recognized, especially in today’s modern age when everything is possible. People can trade even at the comfort of their home at their most convenient time. Forex became what it is today because it rarely sleeps. It is live 24 hours a day and 5.5 days a week. Anyone can almost have access to it, and the liquidity is very high. However, as good as it may sound, forex does not come with advantages alone. It also has its disadvantages and downsides.

What are the benefits that a trader can get from forex trading?

Let us elaborate more on the good side of the forex market. Below is a list of why a lot of traders include forex in their portfolios:

  • Low costs.There are minimal to zero commissions. Brokers make a profit from the currency spreads.
  • Trading style options. Some traders can take advantage of choosing to trade for only a short time since the market is almost always open and live. For example, a person from the US can exchange US Dollars for Australian Dollars during US business hours simultaneously with Australia’s off-hours. A trader can take advantage of these off-hours because there are no massive price changes during this time. This US-based person’s strategy is to gain a small profit. A trader can also use a long-term strategy as desired, proving that forex trading is flexible and convenient.
  •  The forex market has over $5 trillion daily trading volume, making it the world’s biggest financial market. Due to this, the liquidity is very high. Large orders are quickly filled without significant price deviation. The pricing is efficient because there is a low possibility of price manipulation and anomaly.
  • No central exchange. The forex market is decentralized, deregulate, and over-the-counter. There are lesser regulations which might be a good thing for some. Decentralization allows traders to use short-term positions that other markets do not qualify.
  • A trader can take advantage of massive price swings that happen often. Traders can gain huge profits when a suitable position is executed correctly.
  • Low capital requirements. A person can engage in trade without the need for huge capital, unlike other markets. Highly leveraged margin trading allows a trader with a tight budget to make a profit.
  • Easy access. It does not matter if a trader is a novice or a beginner. It also does not matter if the trader chooses a long-term or short-term trade. This reason makes traders easily enter and try forex trading.

The downsides of forex trading

You will notice items listed as disadvantages are also listed above in the advantages section. This fact clarifies that some of the forex market’s strengths are also its weaknesses.

  • Less transparent.This trading is less regulated, and brokers dominate the forex market that may not be fully transparent about filling orders, best price available, and access to trading quotes. However, traders can always choose regulated brokers even when the market is not regulated.
  • Price determination. It is hard to make price speculations and anticipations because political and economic news and events impact the forex market and these are things that are hard to predict. They may be sudden. Say, for example, the COVID-19 pandemic.
  • High risks and leverage. Using leverage can either benefit or destroy a trader. Thorough knowledge about leverage is a must.
  • Self-learning. Other markets have managers and advisers, while a forex trader must have the initiative and determination to learn the market’s ins and outs.
  • High volatility. It is the forex market’s strength and weakness because it can also pose a risk of enormous losses when the market is open 24/7.

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