Owing to its high liquidity, 24/7 schedule, and easy accessibility, forex trading has emerged as a popular career, especially for people with a financial background. Being your own boss with the comforts of making money using your laptop/mobile when its convenient for you is enough motivation for both young graduates and experienced professionals to consider forex trading as a career. However, forex trading has its disadvantages, as well as its advantages. (See related: Forex Tutorial: Introduction to Currency Trading.)
- Low Costs: Forex trading can have very low costs (brokerage and commissions). There are no commissions in a real sense – most forex brokers make profits from the spreads between forex currencies. Hence, one does not have to worry about including separate brokerage charges, eliminating an overhead. Compare that to equity or other securities trading where the brokerage structure varies widely and a trader must take such fees into account. (See related: Forex Broker Guide.)
- Suits Varying Trading Styles: The forex markets run all day, enabling trades at one’s convenience, which is very advantageous to short-term traders who tend to take positions over short durations (say a few minutes to a few hours). Few traders makes trades during complete off-hours. For example, Australia’s daytime is the nighttime for the East Coast of the US. A US-based trader may trade AUD during US business hours, as little development is expected and prices are in stable range during such off-hours for AUD. Such traders adopt high-volume, low-profit trading strategies, as they have little profit margins due to a lack of developments specific to forex markets. Instead, they attempt to make profits on relatively stable low volatility duration and compensate with high volume trades. Traders can also take long-term positions, which can last from days to several weeks; forex trading is very accommodating in this way. (See related: How To Become A Successful Forex Trader.)
- Offers Very High Liquidity: Compared with any other financial markets, the forex market has the largest number of market participants. This provides highest level of liquidity, which means even large orders of currency trades are easily filled efficiently without any large price deviations. This eliminates the possibility of price manipulation and price anomalies, thereby enabling tighter spreads that lead to more efficient pricing. One need not worry about the high volatility during opening and closing hours, or stagnant price ranges during the afternoons, which are trademarks of equity markets. Unless major events are expected, one can observe similar price patterns (of high, mid or low volatility) throughout the non-stop trading.
- No Central Exchange: Being an over-the-counter market operating across the globe, there is no central exchange or regulator for the forex market. Various countries’ central banks occasionally interfere as needed, but these are rare events, occurring under extreme conditions. Most such developments are already perceived and priced into the market. Such a decentralized and deregulated market helps avoid any sudden surprises. Compare that to equity markets, where a company can suddenly declare a dividend or report huge losses, leading to huge price changes. In addition, the chances of insider trading are almost nil (especially on major currency pairs), as there are no insiders in the forex market, which is dependent on global factors and perceived developments.
Such deregulation also helps keep costs low. Orders are directly placed with the broker who executes it on their own. Another advantage of deregulated markets is the ability to take short positions, something that is banned for a few security classes in other markets.
- Volatility Is a Trader’s Friend: The major currencies frequently display high price swings. If trades are placed wisely, high volatility assists in enormous profit making opportunities.
- Variety Of Pairs To Trade: There are 28 major currency pairs involving eight major currencies. Criteria for choosing a pair can be convenient timing, volatility patterns, or economic developments. A forex trader who loves volatility can easily switch from one currency pair to the other. (See related: Top 8 Most Tradable Currencies.)
- Low Capital Requirements: Due to tight spreads in terms of pips, one can easily start forex trading with a small amount of initial capital. Without more capital, it may not be possible to trade in other markets (like equity, futures or options). Availability of margin trading with high leverage factor (up to 50-to-1) comes as the icing on the cake for forex trades. While trading on such high margins comes with its own risks, it also makes it easier to get better profit potential with limited capital.
- Ease: There are hundreds of forex technical indicators to draw on for short-term trades, and several fundamental analysis theories and tools for long-term forex trading, creating enormous choice for traders with varying levels of experiences to make a swift entry into forex trading.
In essence, there are lots of advantages to forex trading as a career, but there are disadvantages as well.
- Lack of Transparency: Due to the deregulated nature of the forex market dominated by brokers, one actually trades against professionals. Being broker-driven means that the forex market may not be fully transparent. A trader may not have any control on how his trade order gets fulfilled, may not get the best price, or may get limited views on trading quotes as provided only by his selected broker. A simple solution is to deal only with regulated brokers who fall within purview of broker regulators. The market may not be under the control of the regulators, but the activities of brokers are.
- Complex Price Determination Process: Forex rates are influenced by multiple factors, primarily global politics or economics that can be difficult to analyze information and draw reliable conclusions to trade on. Most forex trading happens on technical indicators, which is the primary reason for the high volatility in forex markets. Getting the technicals wrong will result in a loss. (See related: Forex Technical Analysis.)
- High Risk, High Leverage: Forex trading is available on high leverage, meaning one can get profit/loss exposure multiple times of the trading capital. Forex markets allow leverage of 50:1, so one needs to have only $1 to take a forex position worth $50. While a trader can benefit from leverage, a loss is magnified. Forex trading can easily turn into a loss-making nightmare, unless one has a robust knowledge of leverage, an efficient capital allocation scheme, and strong control over emotions (e.g., the willingness to cut losses short).
- Self- Directed Learning: In the stock market, a trader can seek professional assistance from portfolio managers, trade advisors, and relationship managers. Forex traders are completely on their own with little or no assistance. Disciplined and continuous self-directed learning is a must throughout the trading career. Most beginners quit during the initial phase, primarily because of losses suffered due to limited forex trading knowledge and improper trading.
- High Volatility: With no control over macro-economic and geopolitical developments, one can easily suffer huge losses in the highly volatile forex market. If things go wrong with a particular stock, shareholders can put pressure on management to initiate required changes, and they can alternatively approach regulators. Forex traders have nowhere to go. When Iceland went bankrupt, forex traders holding Icelandic krona could only watch. The alleged scams involving the Iraqi dinar exist because there is no authority to control its valuations. (Related: Is Iraqi Dinar a Wise Investment?) The 24/7 markets make it difficult to regularly monitor prices and volatility. The best approach is to keep strict stop losses for all forex trades and trade systematically through a well-planned approach.
The Bottom Line
Often perceived as easy moneymaking career, forex trading is actually quite difficult, though highly engaging. Perseverance, continuous learning, efficient capital management techniques, the ability to take risks, and a robust trading plan are needed to be a successful forex trader.