Often perceived as an easy moneymaking career, forex trading is actually quite difficult, though highly engaging. The foreign exchange market is the largest and most liquid market in the world, but trading currencies is very different from trading stocks or commodities.
Due 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 is enough motivation for both young graduates and experienced professionals to consider forex trading as a career.
However, forex trading has its disadvantages, such as high risk and volatility.
- Forex is the largest and most liquid market in the world. Trillions of dollars worth are exchanged every day.
- A career as a forex trader can be lucrative, flexible, and highly engaging.
- There is a steep learning curve and forex traders face high risks, leverage, and volatility.
- 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.
Pros of a Forex Trading Career
There are several advantages that a career as a forex trader, also known as a foreign exchange trader, offers. They include:
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. One does not have to worry about including separate brokerage charges, eliminating overhead costs. Compare that to equity or other securities trading where the brokerage structure varies widely and a trader must take such fees into account.
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 make trades during complete off-hours.
For example, Australia’s daytime is the nighttime for the East Coast of the U.S. A U.S.-based trader may trade AUD during U.S. business hours, as little development is expected and prices are in a 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.
Compared with any other financial market, the forex market has the largest notional value of daily trading. This provides the 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.
Traders don't need to 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 or Regulator
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 intervene 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 (relatively) 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.
This low level of regulation also helps keep costs low. Orders are directly placed with the broker who executes them 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 Can Be 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 another.
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 a 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 of Entry
There are hundreds of forex technical indicators to draw on for short-term traders and several fundamental analysis theories and tools for long-term forex trading, creating an enormous choice for traders with varying levels of experience to make a swift entry into forex trading.
Due to the large size of the forex market, it is less susceptible to insider trading than some other markets, particularly for major currency pairs. However, it is still sometimes subject to market manipulation.
Cons of a Forex Trading Career
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 over 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 the 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.
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).
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.
With no control over macroeconomic 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, for example, forex traders holding Icelandic krona could only watch.
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.
Pros and Cons of a Forex Trading Career
Low overhead costs–there are no commissions or regulatory fees. Anyone can trade forex with a small investment.
Highly liquid, with many market participants. This means few chances for market manipulation or price anomalies.
As the largest market, it is also one of the most versatile. There are many trading pairs, trading styles and analytical tools to choose from.
Low transparency. The biggest traders in the forex are major institutions, meaning you're always playing against the professionals.
High risk. Forex markets allow much higher leverage than equities markets, meaning a leveraged trader can get wiped by small fluctuations in currency prices.
There are no experts or portfolio advisers to rely on. Forex traders have to learn the ropes on their own.
The Bottom Line
The foreign exchange market has emerged as a lucrative opportunity for people with a financial background. With low entry requirements and markets open 24/7, anyone with a laptop or smartphone can potentially score large profits in the forex markets. However, those opportunities also come with high leverage and high risk. Anyone seeking their fortune in forex will need strict discipline and skill in order to succeed.