What is Forex Trading?
Forex, also known as FX or foreign exchange market, is a global marketplace for changing one national currency into another. The Forex markets tend to be the most liquid and largest markets in the world. Many market participants use forex to hedge against international currency and interest rate risk as well as diversity their portfolios.
What are the Pros and Cons of Forex Trading?
Because the forex markets are the largest in terms of daily trading volume they offer the most liquidity which makes it easier to enter and exit positions within seconds for a small spread in many market conditions. Another pro when it comes to forex trading, is that the market is traded 24 hours a day, 5 days a week.
The cons however are that dealers, banks and brokers allow a high amount of leverage. This permits traders to control large positions with little money of their own. In the forex market a ratio of 100:1 is normal, while it is considered high in other markets. When trading it is crucial you are aware and understand the risk that leverage introduces in an account. Furthermore, in order to trade currencies productively, a high level of understanding of economic fundamentals and indicators is needed. For a currency trader to be consistently successful they need to comprehend the economics of the various countries and their interconnectedness to grasp what drives currency values.
What are the Related Risks with Forex Trading?
It’s no secret that trading currencies can be complex and risky. Forex instruments are not standardized and in some parts of the world forex trading is completely unregulated. The interbank market is made up of banks trading with each other around the world. Since the market is made by each of the participating banks providing offers and bids for a particular currency, the market pricing mechanism is based on supply and demand. In light of the fact that there are such large trade flows within the system, it is difficult for rogue traders to influence the price of a currency. This system therefore helps create transparency in the market for investors with access to interbank dealing.
The bottom line is that for traders, especially those with limited funds, day trading in small amounts is easier in the forex market than other markets. Moreover, those with long-term horizons and larger funds, as well as long term fundamentals-based trading can be profitable.
Can Forex Trading Make you Rich?
Like any type of trading, forex trading can also be profitable, but before you even start thinking about risking your hard earned money you need the right mindset.
The first thing you need to understand is that trading takes a certain discipline and a lot of time. It is a long-term game of probabilities so you’ll inevitably win some and lose on other trades. However, as long as you are disciplined enough to stick to your trading strategy and not be emotionally attached to your losses or worse your wins, you will tend to make more winning trades than losing trades.
Next, you need to know what your trading strategy is and you need to master it. You have to know it inside and out and have absolutely no doubts. You need to be very organized and have a trading plan and journal to track your trades consistently. Invest with your calculator and not your heart, stay calm and leave your emotions out of it. Once again only risk the money you are prepared to lose in every trade. In fact you should go in expecting to lose on any given trade so that you are constantly aware of the very real possibility of it happening.
Using a Good Forex Trading System is also key. The trading system should be profitable for a long time and must be simple and easy to apply. It should be of a mechanical nature, allowing very little or even no discretion or judgment from the trader’s part, especially if you are just a beginner trader. It’s crucial you follow mechanical hard and fast rules if you want to be successful.
The bottom line is that Many retail traders turn to the forex market in search of fast profits. Nonetheless, statistics show that most aspiring forex traders fail, and some even lose large amounts of money. Leverage is a double-edged sword, as it can lead to outsized profits but also substantial losses. Furthermore, Counterparty risks, platform malfunctions, and sudden bursts of volatility also pose challenges to forex traders.
If you are interested in forex trading, even though the odds are stacked against you, it would be wise to use and put a few safeguards in place such as limiting your leverage, keeping tight stop losses and using a forex brokerage firm that is reputable.