Foreign Exchange Benefits and Risks

We’ll discuss everything about the benefits and risks associated with the forex market in order for you to gain a deeper understanding of how forex trading works. 

The Pros and Cons

Aspects such as the size, volatility, and global structure of the foreign exchange market have been contributing to its rapid success. With the high liquidity nature of the market, investors are able to set exceptionally large trades without affecting any exchange rate given. In the industry, it is very common to provide low margin requirements to forex traders to make the large positions available. For instance, a trader can control a position of USD 100,000 by putting in as small as USD 1,000 up front and the remainder will be borrowed from forex broker.As investors realize massive gains and rates make small, favorable changes, the amount of leverage serves as a double-edged sword. However, it also has a corresponding risk that can lead to a large loss when the movement of the rates contradict. Despite the broad uncertainties in foreign exchange, speculators are still into placing trades because of the amount of leverage available— it actually attracts investors.

The only market that is truly open 24 hours a day is the currency market, together with a decent liquidity throughout the day. For traders who work daytime or bombarded with heavy workload, it is an optimal market to trade in.

The forex market offers great excitement to investors. However, it also comes with higher risks than equity trading does. The forex market offers ultra-high leverage that translates to fast large gains, but it can also turn into damaging losses and wipe out most of your funds in just a blink of an eye. It is important that market players understand this very well, especially the inexperienced traders. In the forex market, big amount of money is involved, as well as millions of other traders who are eyeing and are reacting quickly on what events are triggering market movements and currency exchange rates.

In fact, currencies don’t move sharply compared to the equity market. Equities move on a percentage basis (where a company’s stock tends to lose a large part of its value after reporting a bad announcement in just a matter of minutes). The leverage in the market triggers volatility. For instance, you used a 100:1 leverage and invested USD 1,000, you are controlling USD 100,000 in capital. If you put USD 100,000 into a currency trade, and the currency price moves by 1% against you, your capital will decrease to USD 99,000. It’s already a loss of USD 1,000— simply speaking, all your invested capital is lost, showing a 100% loss. In equity trading, most investors do not use leverage. A 1% loss in the stock’s value on a USD 1,000 invested capital would only mean a USD 10 loss. Thus, it is very important to taking into account for the short-term uncertainties involved in the forex market before trading in it.

While learning more about trading, you can earn bigger profits and execute better trades here at Trade12 by reading the latest market updates on our official website, Striving to become the best forex broker for you, Trade12 reviews daily market events essential to your trading activities to help you develop a keen understanding of certain trends involving stocks, currencies, indices, commodities, and metals.