Advantages And Risks Associated With Forex Trading
We are always thinking about ways in which we can get the advantage of something while avoiding the risks that are associated with it. Newbies who try their hand at forex trading also have the same approach. All we want is some quick profits without suffering any loss. But realistically speaking, the risk in currency trading cannot be eliminated and trying to avoid the risk will not be feasible for a forex trader. Hence, we only have one option and that is learning to trade while dealing with the risks.
This way, you can get a rewarding trading experience without taking excess risk. For that, we must learn about the advantages and risks that await us in the dynamic currency market. I will be sharing the same through this blog so that you can kickstart your journey with ease.
Advantages of Trading in the Forex Market: Demo & Live Accounts
We will be discussing the advantages of forex trading in detail but before that, you have to know one fact about the forex market. The fast-paced nature of the currency market makes many people join it to make easy money. You can indeed make profits in a short period by trading shorter time frames but there is a lot of learning that has to be done for following intense trading styles and executing it with perfection is not a piece of cake for all. You have to do a lot of learning and planning to become successful with any strategy.
We have to set concrete goals with a long-term approach and stay committed to them till they are realised. When it comes to devising a solid strategy, your kills as a trader must be sharpened. This requires continuous practice on a demo account which is a simulation to experience trading risk-free. You don’t have to deposit any money for trading and the broker lets you place orders with virtual funds or fake money. It is almost identical to an actual account with real-time market conditions and copies the execution too. You can choose MT4 for demo trading, as this platform for trading is easy to navigate and has enough tools for traders to create and test their strategies efficiently.
But it still has some obvious differences from the live trading process as your orders are not going to get executed in the actual market and there is no connection with the live market. In live trading, the broker will not fill your order until and unless a matching order is found to execute it. For example, when you place a buy order for a currency pair, the broker looks for a sell order for the same pair and then it gets executed. This leads to order queueing and price re-quotes can happen which is not considered in demo account execution.
Now that we know about the benefits and drawbacks of demo trading, let’s move on to the advantages of live trading in the forex market.
- High Liquidity
Liquidity is an essential component of a seamless trading experience. The liquidity of a financial market is directly connected to its trading volume and market activities. Thanks to the round-the-clock nature and ease of access, the decentralised global market is always alive. The trading volume is in trillions and the market participants range from ordinary retail traders to the top tier financial institutions and banks functioning as liquidity providers.
Major pairs are the most liquid and most popular which also results in the lowest spreads. Minor pairs are also tradable with sufficient liquidity but a little more volatile and spreads are a bit higher. The least liquid ones are exotic pairs without a doubt as they are not heavily traded due to the high volatility and high risk. The spreads are also highest for these pairs. You should also consider the trading session for assessing the liquidity level before trading your preferred pairs.
- Flexibility and Convenience
Forex market does not have fixed opening and closing times, unlike other traditional markets where trading activities are restricted to a few hours in day time. In forex, there are 4 market sessions based on the opening time of the major financial centres. You can just find a session that works well with your local timezone or schedule while also considering the actively traded pairs. For instance, the EUR/USD pairs are perfect to trade during the New York and London session overlap.
You can also select the pairs that are easy to trade during the Tokyo and Sydney sessions if your trading hours align with these sessions. In short, we won’t have to worry about the timing as long as there is enough time to analyse the market and find ideal trade setups. The flexibility and convenience of the round-the-clock operation is a key highlight for part-time traders who also have a full-time job to focus on while navigating the forex landscape.
- Leverage
All of us dream about making big gains from forex trading but our financial situation may not allow us to risk more money. However, the high leverage offered by forex brokers can be used to advance to the next level by amplifying the trade size without risking a lot of money. You just have to maintain the margin money and the size of your trade positions will get magnified by the leverage. This way, you can maximise your profits as the gains of a winning trade will be multiplied.
You can use a profit calculator to find the potential outcome of a trade and determine the ideal leverage ratio with the help of a leverage calculator. There are different types of trading calculators to find different trade-related values. You should utilise such free online forex tools for ensuring precision and making informed trading decisions. You just have to pick the right tool and enter the required data and it will quickly calculate important parameters.
- Big Trading Opportunities
We often have big goals and ambitions in our mind but we are sceptical about the amount of opportunities that can be found for achieving our financial objectives. But this is out of the question when you become a skilled forex trader. Forex trading continues to grow at a rapid pace. So, you will never run out of opportunities to generate profits, but you need to have the right psychology and a few good trading strategies.
The foreign exchange market is always impacted by fundamental factors like the economic situation of a nation and other impactful global news. This allows you to optimise your profit potential by trying different strategies like news trading. One thing to keep in mind while attempting to seize big opportunities is the risk that comes with it as the possibility of a high reward also brings high risks in trading.
Risks/ Challenges of Forex Trading
- Leverage risk
Earlier we discussed the role of leverage in boosting your profit potential but the benefit can also become a disadvantage or danger for a trader. Because leverage can be a risky deal when you use it in excess. It not only accentuates your profits but also multiples your losses which is a normal occurrence in trading. Your account drawdown can be huge and you may also get caught up in a margin call situation when your account balance falls below the margin level.
Some traders even blow up their trading accounts as the losses wipe out all their capital. Hence, you have to calculate the margin amount accurately and manage the risk by setting a limit to the leverage and paying more attention to position sizing. You should not risk more than 2% of your account balance in a single trade and the rule has to be followed even while trading with margin.
- Operational risks
The operational risk in forex trading has to be considered while creating your risk management plan. The operational risks can range from technical issues you face on a platform to an internet issue that interrupts the trading process. You must be prepared to handle all such issues before trading and the broker you choose should be dependable when it comes to fixing such problems.
Final Word
In the end, I’d just like to mention that you need to take care of the risk involved in trading. If you can manage the risk, then you can brighten your chances of making profits. For risk management, you can backtest your strategies in a demo account and always use stop loss in your trades. Don’t trade emotionally and you will consistently make profits for a long time.
