Why Trade Forex: The Pros and Cons of Forex Trading
What is Forex?
The word "Forex" is obtained by merging the roots of “foreign” and “exchange”. Thus, Forex is a synonym for the concept of the “Foreign Exchange Market”, it includes all operations with currency pairs, securities, precious metals, and investor funds, which are carried out without reference to a specific country or a particular bank.
The main advantage of the Forex market is that it is an international market where you can make a profit by betting on exchange rate fluctuations between almost any currency pair. Anyone can trade in this market, regardless of citizenship and location. Race, gender, sex, age, education, or place of work do not matter here. Anyone who trades at the Forex market is called a trader.
In a global sense, a trader has only one restriction – he cannot enter the interbank market on his own, the international laws do not allow this. Only large, officially licensed companies can become Forex participants and these companies are called brokers. It is through brokers that traders enter the interbank market. Traders register with the brokerage companies, verify their data, make a deposit, and start trading. Nothing could be simpler.
In other words, a Forex broker is a necessary intermediary between a trader and the Foreign Exchange Market. Therefore, it logically follows that choosing a broker is the most important step for any trader.
Characteristics of the modern Forex market:
full internationalism based on world economic relations and globalization;
trading operations are performed continuously and non-stop during the day in all regions of the planet;
all Forex currency transactions are unified and are without restrictions;
high volatility of exchange rates, which does not always depend on economic fundamentals;
the colossal share of operations belongs to physical individuals (traders) and is not connected to commercial transactions.
The advantages of the Forex market for the global economy are obvious. There is a protection against risks through hedging, ensuring the timeliness of international settlements and a direct relationship between the foreign exchange, credit, and financial markets. In a sense, Forex is one of the pillars of the modern global economy.
Top 10 Benefits of Forex Trading
The global economic system today offers many options for earning money for a trader. The Forex market is the most popular, it is the most practical, and it is recognized by many experts as the best method of investing funds and making a profit without effort while maximizing one’s diversification of risks.
This has partly become possible due to the simplification of the trading system for a trader, especially if a trader does not want to trade himself, but chooses an auto trading service or a Trust Management system. We will return to these aspects later, but for now we will consider the key advantages of investing in the Forex market.
Liquid means "converted into money." Accordingly, liquidity is the property of an asset to be sold quickly at or close to market price. Forex liquidity allows a trader to make a profit on the spot, because there is always a supply and demand for any financial instruments at the foreign exchange market, be it currency pairs, fuel or precious metals.
The advantage of the Forex market is based on such aspects as the volatility of currency instruments. The volatility, in this case, is the price range (or price difference) from maximum to minimum during a trading day, week, or another period. If we take the EUR/USD currency pair as an example, then its movement on the chart will be almost perfectly smooth in any timeframe, even within one day.
Because different Forex exchanges are located in different corners of the planet, Forex trading never stops. Bidding goes on 24 hours a day. Wellington is the first to start trading each day. Two hours later Sydney joins in, followed by Tokyo one hour after that. After Hong Kong and Singapore, Europeans pick up the baton in Zurich and Frankfurt. And so on, right up to Los Angeles. A break in trading occurs only once a week — when American exchanges close on Saturday at 01:00 AM GMT, and New Zealand exchanges open again on Sunday at 09:00 PM, because it is already Monday there.
Low entry threshold
This is a critical advantage of the Forex market, which is why it’s so popular among the masses; and because no special economic knowledge is needed to trade successfully in this market. Economic training will, of course provide some advantages but only conceptually because the success of a trader does not depend on his theoretical knowledge in the field of economics, only on his ability to predict the quotes of currency pairs. Experience and perseverance are the equalizers.
Also, only 11-25% of novice traders become successful. This is not because trading is difficult and there are risks, but because the majority of novice traders want immediate colossal profits, so they make colossal errors in trying to reach that unachievable goal.
The threshold for entering the Forex market is very low. The minimum deposit to begin trading is from $1-10. It is advisable to be prudent and start with the minimum amounts.
Margin trading scheme
This is the economic advantage of the Forex market, based on the very mechanism of trading in the international currency market. We are talking about a speculative type of operation using funds provided to a trader by a broker on the security of an agreed amount — the margin. How is margin trading different from regular credit? The difference is that the profit is several times higher than the margin.
This means that, for example, with the security of 2,000 euros, a trader can make a profit of 100 thousand euros. Of course, this is an idealized situation, but the point is that a trader does not set a goal for direct earnings at the Forex market, he earns on fluctuations of the exchange rate. That allows him to make significant profits using leverage, which are funds that a broker is ready to provide to a trader on small security.
This advantage of the Forex market should not be considered bad. There are often advertisements where traders are promised: "one-click registration without verification." This, of course, is a lie. It will still be necessary to verify (confirm) your data before you can become an official participant.
There remain minimal restrictions, however. For example, a trader determines the amount of funds that he will risk; the number of bets that he wants to make; the time frames in which the trade will be carried out; he selects the trading instruments (currency pairs), platforms, conditions, etc. All these conditions are controlled and set by the trader, not the broker. Some brokers do not even have a minimum deposit.
Opportunity to earn on sale and purchase
Forex allows you to earn on the sale and purchase of currency. That is, you buy dollars to sell them at a better price later. Or sell euros on the expectation that the quotes on the currency will fall later and it will be possible to purchase the currency at a cheaper price. Again, this does not require any economic knowledge, especially since modern trading terminals provided by brokers show quotes in real-time, and you can see charts for any period. Free trade without restrictions using a competent approach allows you to get a good stable profit.
Dynamics is an indicator of the market’s volatility, and the foreign exchange market naturally acts here as the absolute leader. Quotes on currency, securities, fuel and metals constantly change minute by minute, and these changes can be predicted by competent observers of the money market. And if they can be predicted, then money can be earned on it. And you don’t even need to sell or purchase anything (although you can). It is enough to bet on how the price will change. It is the dynamics that define the Forex market as such and gives each trader a chance for success.
Large selection of tools
This advantage of the Forex market is important because it allows a trader to progress and not focus on one currency pair. Most often, trading instruments mean currency pairs, for example, EUR/JPY (euro/Japanese yen), or CAD/CHF (Canadian dollar/Swiss franc). There are dozens of such pairs. Also, there are rates for stocks, fuels, and precious metals. However, here it is important to note that the number of trading instruments varies for different brokers, this must be clarified in advance if you plan to trade professionally.
Most often, a broker does not take any commissions for operations from a trader. The logical question is: What is the benefit to the broker? The benefit is the broker charges a spread from each transaction of a trader which is the difference between the purchase price and the sale price. A broker’s margin can be fixed or floating. Because brokerage firms have different conditions regarding a spread, it is worth paying special attention to such an important aspect when choosing a broker. If you register through Traders Union trading association, you can get a return of up to 100% of a spread in the form of a “rebate”.
At first glance, this appears to be counterintuitive because we already said above that the Forex market changes every minute. However, it is this volatility that makes it stable. Quotes are changing all the time. There is always growth after the recession, and after growth comes a recession. This means that it is quite possible to predict any price movement. If a trader does not trade himself but invests in a PAMM account, he receives passive income — literally, without doing anything, only depositing funds promptly and withdrawing them.
Ways to Receive Profit in the Forex Market
Another conceptual advantage of the modern Forex market is that a trader can earn in two ways: by trading independently (directly placing his own bids with the broker) or investing in the market using professionals. Both options have their advantages and risks. Here are some:
●Self-trading in Forex
This is Forex in its traditional sense — you register with a reliable broker, make a deposit, install a trading terminal (if you are using a mobile device; not necessary on a PC), and start trading.
👍 Trading advantages:
- •you are not restricted in your choice of strategies;
- •you are not restricted in your choice of trading instruments;
- •no third parties are involved, all profits are yours (excluding a spread).
👎 Disadvantages of trading:
- •at the initial stage, the risk of losing on almost all transactions is high.
That is, successful trading requires experience. Generally, traders start with demo accounts, then switch to cent accounts and only then to classic dollar accounts. It takes a lot of time and requires constant monitoring of the global financial market to predict the market successfully.
●PAMM and LAMM Investing
PAMM accounts are formed from the accounts of several investors, plus the manager’s account. The manager single-handedly makes decisions on rates, and he risks his own funds in the same way as each of his investors, so he is interested in winning. As a benefit, the manager takes a small commission from each investor in case of winning a bet. The difference between PAMM and LAMM accounts is that investors invest exactly the same amount of money in LAMM accounts as the manager. In the PAMM system, the rates are proportional — that is, an investor can invest a smaller amount, but his profit will be correspondingly lower (although the risk will also be lower).
👍 Advantages of investing in Forex:
- •a manager is an experienced and successful trader, a professional participant in the Forex market;
- •an investor selects and changes managers at will;
- •an investor does not trade himself, all that is required is to deposit funds into the PAMM account.
👎 Disadvantages of investing in PAMM accounts:
- •an investor cannot influence the decisions of the manager in any way; the investor must completely rely on the manager to manage his (the investor’s) funds;
- •PAMM accounts reduce risks but do not eliminate them, because even the most successful traders make bad decisions occasionally.
The advantages of PAMM accounts are obvious: they generate passive income because they do not require the investor to do anything or to have any special skills or knowledge. The main thing is to choose a successful manager. Moreover, innovative systems such as RAMM also allow a trader to set risk limits and interrupt the participation of his funds in the transaction at any time.
●Investing vs Trading
It is very difficult to say which one is better. Trading allows you to develop your own strategies and win huge sums on your transactions. In contrast, when you invest, you are trusting a professional to make all the decisions for you, especially if you are just taking your first steps in the Forex market. This significantly reduces your risk of losing funds. Also, it’s passive income and a unique experience because you get access to the statistics of a manager’s transactions.
|Independent Forex Trading||Investing in PAMM and LAMM|
|Minimum deposit||From 0 US dollars, depends on the terms and conditions of a particular broker||The amount is determined by a manager|
|Bonuses||If there are bonuses, they depend on the terms and conditions of the broker||As a rule, there are no bonuses|
|Restrictions||The only restriction is the leverage of a broker||A manager can set restrictions on the deposit and the number of investors|
|Necessity of the market analysis||Yes, a trader needs to intensely monitor the global financial market||No, an investor does not need to monitor the market, this is the manager’s task|
|Possible risks||Loss of funds due to incorrect predicting||Loss of funds due to a manager’s error|
Investing in PAMM/LAMM accounts frees a trader from the need to correctly predict the market and reduces the risk of losing funds because the chances for a successful transaction by an experienced professional are greater. Also, this is passive income. Moreover, you can diversify risks by distributing funds among several managers.
On PAMM accounts all decisions — on instruments, rate, and timeframes, etc. — are made by a manager, and there is no way you can influence this. Besides, no theory can replace real practice. Therefore, if you want to fulfill yourself as a trader, investing will not give you the necessary experience.
Therefore, the question which is better, "Investing or trading?" has no right or wrong answer. Each of the options has its own advantages, and it is best to make a choice based on the goals that you set for yourself.
Pros and Cons of Forex Trading
The advantages of the Forex market are based on its accessibility and its being unified, which allows everyone to trade at the interbank.
The main disadvantage is that the risk of loss cannot be completely eliminated. That is, a trader must understand that any one of his transactions may be a failure. However, this risk can be minimized in three ways:
A trader can entrust his funds or a part of his funds to a professional manager. This will reduce the likelihood of losses due to the trader’s inexperience or personal error.
By distributing a deposit among several bets, a trader can level the loss of one bet by winning on others. Similarly, you can distribute funds among several PAMM accounts, called PAMM portfolios.
Although even the most experienced traders have failures, it is one’s experience in trading in the Forex market that is the main factor that helps to minimize risks. Both skills and intuition become refined with experience; and their combination allows a trader to win more often.
Forex Regulation and Reliability
Forex market regulation takes place locally, that is, each country has its own laws that determine the activities of brokers and traders. Also, there is international law. In the context of trading, the most important are regulatory organizations that govern and monitor brokers. That is, today every broker is an officially registered company with transparent reporting, which does not work on its own, but is subordinate to a state or international regulator.
Examples of local regulators
— the Central Bank of the Russian Federation (Russia), Financial Services Authority of the United Kingdom (Great Britain), the Federal Financial Supervisory Authority (Germany).
Local and international regulators have their own differences, but a broker needs to have one. After all, it acts as a kind of guarantor that a broker sends traders' transactions to the international Forex market and fulfills its obligations to its clients and the Forex markets.
A broker’s license has to be indicated on its official website and can be easily checked at a regulator’s portal.
Remember, if you choose a licensed broker, it will not be a scam outfit, a financial pyramid scheme, or a Forex kitchen. Working with such a licensed broker is reliable and safe.
Expert Opinion of the Traders Union
“Today, the benefits of the Forex market are obvious. This is a unique financial system where everyone can earn money, including passive income from investing. Yes, of course, there is always a risk, and initially, it is quite high. However, it can be successfully diversified by choosing a trusted broker, a competent distribution of funds, and a well-thought-out trading strategy. As a result, Forex can become, and it has already become for many people, a stable source of significant income.”
Antony Robertson, Trader-Analyst of Traders Union
FAQs Regarding Forex Benefits
What are the real benefits of the Forex market?
Forex allows everyone to earn money by offering a large number of methods and trading tools. There is a risk, but it can be diversified because a trader has almost no restrictions on strategies. There is a possibility of investing to receive passive income.
How reliable is the modern Forex market?
It is a stable but dynamic system and the reliability of trading is determined not by the market, but largely by a broker through which a trader is trading. A licensed broker is a guarantee of protection against fraudulent schemes, financial pyramids, and Forex kitchens.
Which is better, trading or investing?
Each option has its own advantages, but they differ radically in approach. Investing results in a stable passive income that does not require anything from an investor other than replenishing a deposit. Trading gives you more freedom and allows you to improve your personal skills.
How can I minimize the risks at Forex?
You can start with a demo account and a cent account to learn the basics. Then you should work with portfolios, that is, distribute a deposit among several accounts. Also, risks are reduced if a trader works under the trust management scheme or invests in a PAMM account.