The forex market is the largest market in the world made up of money changers all over the world, connected virtually via means of information. Online forex trading comes with many pros and cons. Some of these advantages and disadvantages are as follows:
Advantages of forex trading online
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Flexibility
Forex currency markets give traders a good amount of flexibility. The reason for this is that there is no restriction on the amount of money that can be used when it comes to trading. Another key factor is that there is almost no regulation of the markets. When combined with the fact that forex online trading markets operate on a 24×7 basis, traders have a highly flexible scenario. Those with regular jobs also have the opportunity to indulge in the world of forex, in their downtime and on weekends. The same is not true when it comes to trading bonds or stocks from one’s own country.
For this reason, forex trading is the recommended choice for traders part and full time, as it offers a flexible schedule with as little interference in their full-time jobs. Even though the forex market is huge and operates across a variety of time zones, any information regarding this market is easily available. For some entities, short term advantages may occur due to the time lag in passing information. However, this advantage cannot be sustained across time.
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Trading Options
Traders are given a variety of options to carry out online forex trading, like trading in hundreds of currency pairs. Traders also have the option to enter into a spot trade or they can enter a future agreement. Futures agreements are also available in varying sizes and at different maturities so they can meet the needs of forex traders. Hence, forex trading online gives people the option for.
Therefore, forex trading online gives traders at every risk appetite and budget the opportunity to trade. Another point to take into consideration is that forex markets provide traders massive trading volume. In fact, more trading occurs in the forex market than anywhere else in the world. This is why forex offers liquidity that is unmatched to traders who can exit or enter the market in a matter of seconds, as they feel comfortable.
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Transaction Costs
Online currency trading on the forex market creates an environment that has low transaction costs in comparison to other markets. When it is compared to other markets on a percentage point basis, trading on Forex has much lower transaction costs when compared to other markets. The main reason forex trading transaction costs are so low is because it is largely operated by dealers who reserve a spread for themselves to mitigate risk and offer a two-way quote. Overall, the brokerage that is pure play is quite rare in forex markets.
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Leverage
Of all the financial asset markets, online forex trading offers traders the most amount of leverage. The reason leverage is most pronounced in these markets is that investors have the opportunity to lever their original investments by as many as twenty or thirty times and trade in the market. Not only does this magnify potential profits but losses as well, so traders should be careful with margin trading. Even if forex market movements are small, traders can end up losing or gaining a vast amount of money as a result of leverage.
Disadvantages of forex trading online
It is incredibly biased to talk only about the advantages of forex trading, without paying any attention to its disadvantages. Hence, in the interest of full disclosure, some of the disadvantages are as follows:
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Counterparty Risks
The online forex trading market is an international one, which is why regulating it is a difficult issue. Regulating forex markets pertains to the sovereignty of the currencies of many countries. The scenario created as a result of regulation being a struggle is that the forex market remains largely unregulated. Hence, there is no centralized exchange that can guarantee the execution of trades being completely risk-free. Hence, when traders or investors enter into trades, they are mandated to be cognizant of the default risk they face. This is the risk that the counterparty may neither have the intention or the ability to honor contracts. Hence, forex trading involves the careful assessment of counterparty risks as well as creating plans that can mitigate these risks.
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Leverage Risks
In comparison to all other currency markets, forex markets provide the maximum leverage. The word ‘leverage’ almost automatically implies a gearing ratio of twenty to thirty times added risk, which can result in a huge amount of gains or losses. When the fact that there are no limits on the amount of movement is taken into consideration, it is possible that in any given day, a person may lose all their investments within a matter of a few minutes. Novice investors who are much more prone to making such a mistake need to be on their guard.
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Operational Risks
Forex trading operations are operationally difficult to manage. The reason for this is that the forex market operates on a 24×7 basis, while humans do not. Hence, traders have to resort to algorithms to protect the value of their investments especially when they are away. Alternatively, multinational firms possess trading desks that are spread out across the world. This can only be carried out if trading is conducted on a very large scale.
Conclusion
In short, the forex market caters to individuals with different budgets and risk appetites. Due to a huge amount of leverage, investors should be mindful when trading on forex, as it also remains largely unregulated. However, due to its 24×7 availability, it gives almost anybody the opportunity to trade at their convenience.
