Foreign exchange is the largest market in the world in terms of the daily trading volume. Every day the value of foreign currencies goes up and down relative to one another, and with this changing value, traders aim to make some profit out of it. Moreover, the forex market is open 24 hours a day and five and a half days a week, making it a very liquid market for trading.
Forex trading is nothing but buying and selling two currencies at the same time. The main difference between foreign exchange trading and trading stock or bond trading is that the trading in forex is always done in pairs such as Euro/USD. When you are buying one, you have to sell another. And the relative exchange value of the currency at the time of trading determines your profit. However, like every other trading field, forex also comes with some pros and cons with it.
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Let’s have a look into some crucial pros and cons of this market.
Pros of Trading Forex
The main benefit that attracts the traders more towards this market is the volume of this market. It is the largest market on Earth in terms of per day trading volume. Therefore, it is very to enter or exit a position of the major currencies within a fraction of a second. It gives you the liberty to analyse the market trend and avoid the risk factors involved in trading.
Forex market is open for 24 hours a day, making it the most liquid market to trade. Besides, the broad time horizon helps the traders cover their losses or earn more profits from the market.
All the rules and regulations in forex trading are pretty similar to another traditional trading, and the initial investment is also low. That is why it is easier to enter the market as a beginner compared to the stock market. Besides this, you can take high leverage from the trade brokers to start your trading in the forex market.
Unlike the stock market, the chances of manipulation through insider information in trading forex are lower. Those who have already invested or traded in the stock market know very well how much it manipulates the market if a whistle-blower leaks confidential information.
The entire process of trading forex is done electronically. So you can check the market trend, your account position, and other crucial information about the market from anywhere. Moreover, there are many modern trading platforms like MT4, MT5, etc., through which you can access your trading account easily.
Cons of Trading Forex
Like every other market, trading forex also comes with certain limitations. As a newbie in the field, you should have a clear idea about the other side of the market to lower the risk factors while trading.
Like every other trading market, first, you have to be familiar with the terminology of the forex. The more you learn about the market, the more your chances of profit from it.
Although they are the most liquid market on Earth, forex trades are still considered much more volatile than regular markets.
In forex markets, there are no instruments that generate regular income, such as dividend payments. Because of this reason, investors who are not interested in exponential returns turn their back from trading forex.
To have a firm grip on the forex market, you should possess the knowledge of basic economic fundamentals and indicators. Dealing with foreign currencies needs wider economic knowledge of different countries, and that comes with constant learning about that country’s financial situation. Apart from the economic knowledge, you should also learn how to use modern trading platforms like MT4, MT5, etc., efficiently to be the master in the business.
If you are new in the field of the forex market, you must understand the use of leverage in detail. As the forex markets allow a high amount of leverage, the traders can control large positions by investing relatively little money of their own.
Some Terminologies Related to Trading of Forex
The best way to start your journey as a trader is to learn the language of the market. Here you will find some common terminologies that will help you to know the market well.
Forex account- It is basically used to trade the currencies. Every user has a unique forex account number under which all the account information is stored.
Ask- The lowest price at which you are willing to buy a specific currency is known as ‘ask’ (or offer).
Bid- The price at which you intend to sell a currency is called a bid. The bid price is generally lower than the ‘ask’ price.
Leverage- The usage of borrowed capital to multiply returns is known as leverage. The forex market is considered to be a high-leverage market.
Lot size- The number of currencies in which you are trading at a time is called the lot size of the trade. In general, there are four types of lot sizes- standard, mini, micro, and nano lot. The bigger the lot size you trade in, the higher profits you generate. So if you are new in the market, you should always start with a nano lot to gain experience
Spread- The difference between the bid price and ask price of a currency is known as the spread. The spread value is the key factor on which your profits depend.
Margin- The amount set aside in a forex account for future currency trade is known as margin. Margin money helps the broker to decide whether a trader will remain solvent in the market or not.
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The potentiality of the forex market is huge, as worldwide, it is the highest traded market per day in terms of volume. But every finance trade comes with some pros and cons. If you have the patience to learn and study the market trends, you can be the master of the business in no time.