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.

---

Two Timeless Rules in FOREX Investing

RULE #1) ~ Cut your losers; let your winners ride.One... Read More

5 Questions You Need To Have Answered Before You Back-Test Your Forex System

As 90-95% of new forex traders lose money within the... Read More

Online Forex Trading

Foreign exchange currency trading is also known as Forex trading,... Read More

Money Management, Part 2

FEARING LOSSESThere is a huge difference between being risk averse... Read More

Forex Made Easy for Everyone

Forex made easy is as simple as you would want... Read More

ISO 4217 in Forex Trading

ISO 4217 is an international standard describing three letter codes... Read More

Stopping Yourself

I read on a bulletin board a traders comment that... Read More

The Meaning of FOREX Price Charts and How to Use Them

There is one very important factor that you should consider... Read More

Business and the Forex

The business world is a complex web of supply and... Read More

A Look at Forex Market Makers

The investor in the currency market takes for granted that... Read More

A Fools Game

I received an email this week with a question (below)... Read More

Day Trading Course or Day Trading Technique Seminar: Learn Day Trading Education

Profitable day traders recognize that momentum trading is among the... Read More

Forex Profits

The Forex Market-What, When and Why?Forex, FX and the Forex... Read More

Welcome to the World of Currency Trading

Indeed large multinational and individual banks and other major financial... Read More

The Secrets of the Super-Traders

The first and perhaps most important "secret" is to realize... Read More

Types of Foreign Currency Hedging Vehicles

The following are some of the most common types of... Read More

Exploring the World of Day Trading

Are you looking into a career in day trading? In... Read More

Trading Tips No 1: Learn How to Trade The Moment of Truth

So you have learned how to trade the markets by... Read More

What is Forex Trading?

Forex, or Foreign Exchange, is the simultaneous exchange of one... Read More

Chinas New Currency Regime

The base unit for the renminbi is the yuan, which... Read More

Psychology Of Trading

The psychological aspect of trading is usually underestimated by those... Read More

Money Management, Part 1

There are some common mistakes I've seen traders make in... Read More

What I Learnt Losing £60,000 My First Year as a Full-time Trader

During my first year as a local (independent trader) on... Read More

Commodity Trading - Advantages and Disadvantages

What Is Commodity Trading?Commodity futures markets allow commercial producers and... Read More

Online Forex

Q1: When you consider that the foreign exchange market has... Read More

Forex Trading

Foreign exchange market, or better known as FOREX, is the... Read More

New Opportunities with Forex Trading

The simplest definition of currency trading is the practice of... Read More

Advantages of Trading FOREX Over Stocks and Commodities

There are many advantages to Trading FOREX as your main... Read More

A Short Introduction To FOREX

FOREX is the world's largest and most liquid trading market.... Read More

Stock Market Report: Day Trading or Swing Trading Online? Stock Investing Information

Profitable day traders recognize that momentum trading is among the... Read More

E-currency Exchange Trading

If you are reading this article you are probably one... Read More

Learn Forex Trading - a Guide for Beginners

One can learn forex trading as easily as one would... Read More

Risk and Stock Trading Fees: The Two Barriers To Overcome If You Want A Successful Trading Career.

You know the old joke:"How do you make a million... Read More