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Why Investing in Forex: Pros and Cons of the Currency Trading Market

admin on August 8th, 2008

If you are considering starting to invest your money in the currency trading market, you might be wondering what all the recent fuss is about: everywhere you go, you see ads of online forex brokers saying how you can start investing with them even with a very small capital, as low as $100, and have a potential for huge profits.

Before you jump right into this very risky world, you should consider your position very carefully. Forex trading is not for everyone: it’s true, you can start investing with a very low capital and potentially earn even 10% a day, but unless you know what you are doing, your chances of burning all your money in your first trade is at least as high.

Pros of Forex Trading

You can start trading with a very low capital, because when you open a trade you are leveraging your investment by getting a loan (typically 50x to 400x your initial investment) from your broker. This means that, for instance, you can invest $100 and somehow “pretend” you are actually investing up to $40,000, depending on your leverage. This means that a small change in the market will reflect in a much bigger profit or loss for your open trades.

Another advantage in forex trading is that you are able to trade from the confort of your own home, beer and underpants and all. Many online brokers offer you different payment methods, including PayPal, so it’s very easy to get started in this business.

Trading hours are another good perk: unlike the stock market, you can trade in the forex market 27/5, so you won’t have to worry about getting up in the middle of the night to catch the best timeframe to trade (this is however only true to some extent, since there are well-known timeframes during the day during which the market tends to move more than usual).

Other often cited advantages in the forex market are its very high liquidity, the ability to profit both on bullish and bearish market conditions, the fact that there are typically no commissions or fees, and the number of online brokers available.

Cons of Forex Trading

Novice traders often tend to forget that an high leverage can work against you as well as for you, and the truth is that, unless you know what you are doing, leverage will most certainly work against you in the long term.

Moreover, the fact that you are able to start investing with a very low initial capital doesn’t mean that you should — many novice forex traders simply disregard this aspect, and as a result the most common cause of failure in newbie forex traders is a direct consequence of undercapitalization.

Proper education is a fundamental asset for every forex trader, and you simply can’t do without it. As a matter of fact, many forex traders build their strategies in a way that specifically targets taking money from the less experienced trader!