What Is Forex? And What Is It Pros And Cons?

By Steven Hatzakis Thursday, December 21, 2017
Forex appeals greatly to traders and businessmen, and it has many advantages that no other markets have. But what is Forex, exactly? Let’s find out!

What Is Forex?

Forex is a marketplace where the country’s currencies are traded for another’s. It plays an important role in many businesses and has the most excessive daily trading volume of nearly $4 trillion.



By exchanging different currencies when traveling overseas, you are considered to have participated in a Forex transaction. For example, when you take a trip to America and you convert your JPN yens to US dollars, how much US dollars you will get is based on the exchange rate between the two currencies.
Companies use Forex as a hedge to trade with foreign companies. By buying foreign currencies in a swap or forward market, they can plan future transactions with an agreed rate. So, even if there are fluctuations in the exchange rate, it would not affect the trade.
   
Therefore, a speculative market was found for current and future exchange rates. There are opportunities as well as risks when dealing with Forex, so Forex traders must take bets and a macro view of the economy in order to speculate certain currencies.

Pros and Cons of Forex Trading

Pros

Liquidity and Flexibility

The FX market appeals greatly to traders and businessmen due to its liquidity and flexibility. There’s no restriction or limit to how much currency you can trade in this market, meaning that it is flexible with time and work.

For traders, there aren’t too many rules or principles in the market which works 24 hours a day, 7 days a week with a lot of buyers and sellers. As a result, players in the market can make trading swiftly and efficiently.

Continuous Operation

The FX market is open 24 hours a day, 7 days a week no matter what the situation is, suggesting that unlike any other markets such as stocks and commodities, we can open or close trades at any conventional hours we want. Participants can also get updated on the market trends anytime throughout the day. 

Variety of Options

There are plenty of options available in the FX market. By trading different currencies in pairs, businessmen, traders, importers or exporters can use the wide diversity of Forex market to their best advantages. Taking advantage of this feature, an individual can either enter a spot trade or sign future agreement contracts while keeping the budget and risk factors in mind.

Low Entry Level and Reasonable Costs

Foreign exchange trading has a low-cost investment compared to other ways of investments aside from having a wide variety of options. Traders can open a trade position with FX brokers for just $100 due to high leverage. Compared to other markets, the Forex market is fairly reasonable on a percentage basis because of the direct engagement of the dealers in avoiding risks.

Low Transaction Costs

The difference in selling and buying prices is mainly how an FX broker makes their revenue. This is called the spread and you are only charged for a small fee compared to a traditional stock broker’s fee because of the high trading traffic.

No Market Manipulation

Because the Forex market is so universally large, it is impossible for a big player to overpower or manipulate it. Placing a big order in Forex will not have a huge impact on the price like other smaller markets, but the government and global news stories will have the most influence on the market.

Volatility

If there is a more profitable and better suited for investment currency, an investor is enabled to freely switch to that required currency. Although there are risks in such a capital driven market, volatility in the Forex market gives higher profit when switching to a potential currency. This ultimately cancels out the risk factor and increases profit, creating more opportunities.

Cons

Brokerage

The investment will lack transparency and be less profitable when a brokerage is involved, so it is recommended to look for a broker who follows all the rules and regulations of Forex trading. The market may not be effective under the principles, but it may work with the activities of broker.

Price Determination Process

The process of price determination in foreign trade exchange is often seen as complex due to many forces that influence and fluctuate the exchange rates. The unsteadiness of prices is largely caused by global politics and economic influence on the currency rate. That’s why a currency trader needs to have a big-picture understanding of the economies of various countries and their connections to determine whether the trade is going to be a loss.

Independence

Without adequate macroeconomics knowledge, newcomers might suffer significant losses when entering the market despite having trade managers or advisors for advice. Ultimately, Forex traders are required to work independently in this foreign trade exchange market for effective trades.

High Volatility

The high volatility characteristics of the Forex trading can be a double-edged sword. It is not easy for investors to take risks and invest money when changes in the global politics and economy significantly influence the foresight and speculations about the Forex market. There is no doubt that a market can go down, making a lot of investors lose a large sum of money.

Scammers

Another thing to watch out for in the Forex trading market is scammers that are always lurking to take advantage of investors and take all the profits. It is important that the investors find someone reliable, trustworthy who won’t cheat and play fair. This also leads to fear in traders when they become uncertain of what to do and who to trust, making it hard to take risks.

Never Sleep

Although this makes it easier for investors in time management, this market never sleeps as well as the investors. They must constantly keep an eye out for the market trends that might get unpredictably updated and fluctuate at any minute throughout the day.

Conclusion

Before ending this post, I have one thing to tell Forex newbies that getting proper education about the Forex market is especially recommended if you do not want to lose money easily. All beginners should gain basic knowledge about how the market works by studying the in and out of the foreign exchange market before making any real trades.