Why to Trade Forex - All Pros and Cons

Share this:

Top 10 Benefits of Forex Trading

Forex trading provides traders an accessible, low-cost market with opportunities for leveraged trading, constant liquidity, and exposure to macroeconomic forces. With practice and prudent risk management, it can be an attractive opportunity for many traders.

  • 1

    High liquidity

    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.

  • 2

    Round-the-clock trading

    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.

  • 3

    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.

  • 4

    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.

  • 5

    Minimum restrictions

    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.

  • 6

    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.

  • 7

    Dynamics

    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.

  • 8

    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.

  • 9

    No commissions

    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”.

  • 10

    Stability

    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.

Forex Trading Drawbacks (Risks)

Let’s take a closer look at the main drawbacks associated with Forex trading:

High Leverage

Leverage in Forex trading refers to the practice of borrowing money from a broker to control a larger position in the market. While leverage can amplify profits, it can also significantly increase the risk of losses, especially for inexperienced traders. Using 100:1 leverage, a trader with $1,000 can control a $100,000 position. If the market moves 1% in their favor, they double their investment. However, if the market moves 1% against them, their entire account balance is wiped out.

Difficult Market Analysis

Traders often use two primary methods for market analysis: technical and fundamental analysis. Technical analysis involves studying historical price data, charts, and patterns to predict future price movements. Fundamental analysis focuses on understanding the underlying economic factors that drive currency values. Both approaches require a deep understanding of the market and the ability to interpret complex information to make informed trading decisions.

Lack of Pricing Transparency

The Forex market is decentralized, meaning it has multiple liquidity providers such as banks, financial institutions, and market makers determining currency prices. As a result, different providers may quote slightly different prices for the same currency pair at the same time. This discrepancy can make it challenging for traders to accurately assess the fair market value of a currency pair, leading to potential confusion and suboptimal trading decisions.

Furthermore, some brokers may not provide the best available prices or may add a markup to the bid-ask spread, which increases the cost of trading for their clients.

Regulation Issues

Some of the issues arising from regulation discrepancies in the Forex market include:

Varying regulatory standards: Different countries have their own regulatory authorities, each with distinct rules, requirements, and levels of oversight. This disparity can create inconsistencies in the protection offered to traders and the standards that brokers must adhere to.

Unregulated brokers: Some brokers may operate without proper regulation or oversight, putting traders at risk of fraudulent practices, such as price manipulation or misappropriation of funds. Unregulated brokers often operate in jurisdictions with lax regulatory environments, which allows them to evade scrutiny.

10 Best unregulated Forex brokers

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

Conclusion
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.

Summary

While Forex offers opportunities to profit from currency fluctuations, it is a very risky market for individual retail speculators without proper preparation and risk controls. The odds strongly favor losses for inexperienced traders. Only investors who are prepared to consistently apply discipline, set risk limits and have sufficient capital to withstand drawdowns should consider active forex trading. For most individuals, a low-risk diversified investment portfolio is often a safer way to grow wealth over the long run.

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, Contributor

FAQs

Is Forex trading profitable?

Forex trading can be profitable, but most retail traders lose money due to factors like poor risk management, lack of experience, relying on unreliable strategies, overtrading, emotions, etc. Consistent long-term profits require education, a sound methodology, and strict risk controls.

How do I start Forex trading?

Decide on a broker and open a demo account to practice. Learn technical analysis, chart patterns, indicators and market fundamentals. Formulate a trading plan and strategy. Only risk 1-2% of your account per trade. Be disciplined and manage risk through stop losses. Give it time to develop skills before trading with real money.

What currency pairs should I trade?

Popular major pairs include EUR/USD, USD/JPY, GBP/USD, USD/CHF. These offer good liquidity. Look at economic reports/events affecting each currency and trade pairs that interest you. Start with 1-2 pairs to focus on.

What are pips in Forex trading?

Pips refer to the minimum price movement in a currency pair, usually 0.0001.

So if EUR/USD moves from 1.1000 to 1.1001, it moves 1 pip in favor of the Euro.

For yen-based currency pairs like USD/JPY, the minimum price movement or pip value is 0.01 instead of 0.0001. This is because the Japanese yen has only two decimal places, compared to four decimal places for most other major currencies.