Foreign exchange, also known as forex or currency trading, is an international market that is extremely liquid and comes with substantial day-to-day trading opportunities. Similar to other investments, forex trading is not the best option for inexperienced traders with low-risk tolerances. However, there are both benefits & risks associated with this investment.
And here at CWS Capital, we want to help you understand this market – its highs and lows, peaks and valleys – so you can make wise decisions when investing in forex.
So if this is something you are curious to learn more about, then keep reading to learn the advantages and disadvantages of forex trading.
Advantages of Forex Trading
1. It’s a 24-Hour Market for a Week
As an international market, forex trading is ongoing as long as a market somewhere in the world remains open. In the U.S., trading hours start when the first large-scale market opens, which is in Sydney, Australia, Sunday, at 5 pm, eastern time. Additionally, trading closes for the week as soon as the last large-scale market, located in NYC, closes at 5 pm on Friday.
2. High Liquidity Levels
Simply put, liquidity is being able to quickly convert an asset to cash. As it pertains to forex, high liquidity levels entail vast quantities of capital being transferred both into and out of currencies with overall minor spreads—this is the differing factor between the offer prices for prospective buyers and the asking prices for prospective sellers.
3. Leverage Utilization
Forex brokers usually permit traders to both buy and sell in the market utilizing abundant quantities of leverage, which grants them the capability to trade with larger sums of money than what’s really in their accounts. For example, if you traded at 50:1 leverage, you’d be able to trade $50 for each $1 deposited in your account. This means you could manage a trade of $50,000 with only $1,000.
Disadvantages of Forex Trading
1. Interest Rate Risks
Interest rates influence a country’s exchange rates. For instance, if a country’s interest rates increase, its currency will likely increase as well via a stream of investments in that country’s assets due to a more robust currency offering better returns. Moreover, if interest rates drop, its currency will potentially fall as investors start extracting their investments. Because of the tendencies of interest rates and their meandering impact on exchange rates, the distinction between currency standards can result in forex prices drastically altering.
2. Risks With Leverage
With forex trading, leverage demands a minor upfront investment, this is referred to as a margin, to obtain accessibility to large-scale trades in remote currencies. Small price shifts can cause what is called ‘margin calls’ where the investor must pay an additive margin. In tumultuous market environments, hostile utilization of leverage can cause major losses in upfront investments.
3. Counterparty Risk
In a financial transaction, the counterparty is the business or organization that offers the asset to the investor. For this reason, counterparty risk encompasses the risk of the dealer or broker defaulting in a specific transaction. With forex trades, there is no guarantee of spot and forward contracts on currencies.
There are risks and advantages associated with anything you do, and forex trading is no different. For this reason, it’s crucial to understand your downside risk so you are properly prepared. Moreover, it’s equally important to understand the benefits as well as they will help remain steadfast toward your desired outcome. This is especially prevalent when it comes to something as potentially volatile as forex trading.
If you’re interested in a forex investment solution and would like your funds to be handled by a team who has the knowledge, skills, and experience to competently manage your investment in this complex environment, then contact us today to see if you qualify.