There are several advantages that a career as a forex trader, also known as a foreign exchange trader, offers and these include:
Low Costs
Forex trading can have very low costs (brokerage and commissions). There are no commissions in a real sense–most forex brokers make profits from the spreads between forex currencies. One does not have to worry about including separate brokerage charges, eliminating an overhead. Compare that to equity or other securities trading where the brokerage structure varies widely and a trader must take such fees into account.
Suits Varying Trading Styles
The forex markets run all day, enabling trades at one’s convenience, which is very advantageous to short-term traders who tend to take positions over short durations (such as a few minutes to a few hours). Few traders makes trades during complete off-hours.
As an example, Australia’s daytime is the night-time for the East Coast of the U.S. An Australia based trader may trade AUD during U.S. business hours, as little development is expected and prices are in stable range during such off-hours for AUD. Such traders adopt high-volume, low-profit trading strategies, as they have little profit margins due to a lack of developments specific to forex markets. Instead, they attempt to make profits on relatively stable low volatility duration and compensate with high volume trades. Traders can also take long-term positions, which can last from days to several weeks so forex trading is very accommodating in this way.
High Liquidity
Compared with any other financial markets, the forex market has the largest number of market participants. This provides the highest level of liquidity, which means even large orders of currency trades are easily filled efficiently without any large price deviations. This eliminates the possibility of price manipulation and price anomalies, thereby enabling tighter spreads that lead to more efficient pricing. One need not worry about the high volatility during opening and closing hours, or stagnant price ranges during the afternoons, which are trademarks of equity markets. Unless major events are expected, one can observe similar price patterns (of high, mid or low volatility) throughout the non-stop trading.
No Central Exchange or Regulator
Being an over-the-counter market operating across the globe, there is no central exchange or regulator for the forex market. Various countries’ central banks occasionally interfere as needed but these are rare events, occurring under extreme conditions. Most such developments are already perceived and priced into the market. Such a decentralized and deregulated market helps avoid any sudden surprises. Compare that to equity markets, where a company can suddenly declare a dividend or report huge losses, leading to huge price changes.
Such deregulation also helps keep costs low. Orders are directly placed with the broker who executes it on their own. Another advantage of deregulated markets is the ability to take short positions, something that is banned for a few security classes in other markets.
Volatility a Trader’s Friend
The major currencies frequently display high price swings. If trades are placed wisely, high volatility assists in significant profit making opportunities.
Variety of Pairs to Trade
There are 28 major currency pairs involving 8 major currencies. Criteria for choosing a pair can be convenient timing, volatility patterns, or economic developments. A forex trader who loves volatility can easily switch from one currency pair to another.
Low Capital Requirements
Due to tight spreads in terms of pips, one can easily start forex trading with a small amount of initial capital. Without more capital, it may not be possible to trade in other markets (like equity, futures or options). Availability of margin trading with a high leverage factor (up to 50/1) comes as the icing on the cake for forex trades. While trading on such high margins comes with its own risks, it also makes it easier to get better profit potential with limited capital.
Ease of Entry
There are hundreds of forex technical indicators to draw on for short-term trades, and several fundamental analysis theories and tools for long-term forex trading, creating enormous choice for traders with varying levels of experience to make a swift entry into forex trading.
Disadvantages of a Forex Trading Career
Whilst there are lots of advantages to forex trading as a career, there are disadvantages as well which include:
Lack of Transparency
Due to the deregulated nature of the forex market dominated by brokers, one actually trades against professionals. Being broker-driven means that the forex market may not be fully transparent. A trader may not have any control on how his trade order gets fulfilled and may not get the best price, or may get limited views on trading quotes as provided only by his selected broker. A simple solution is to deal only with regulated brokers who fall within purview of broker regulators. The market may not be under the control of the regulators, but the activities of brokers are.
Complex Price Determination Process
Forex rates are influenced by multiple factors, primarily global politics or economics that can be difficult to analyze information and draw reliable conclusions to trade on. Most forex trading happens on technical indicators, which is the primary reason for the high volatility in forex markets so getting the technicals wrong will result in a loss.
High Risk, High Leverage
Forex trading is available on high leverage, meaning one can get profit/loss exposure multiple times of the trading capital. Forex markets allow leverage of up to 50:1, so one needs to have only $1 to take a forex position worth $50. While a trader can benefit from leverage, a loss is magnified. Forex trading can easily turn into a loss-making nightmare, unless one has a robust knowledge of leverage, an efficient capital allocation scheme, and strong control over emotions (e.g., the willingness to cut losses short).
Self Directed Learning
In the stock market, a trader can seek professional assistance from portfolio managers, trade advisors, and relationship managers. Forex traders are completely on their own with little or no assistance. Disciplined and continuous self-directed learning is a must throughout the trading career. Most beginners quit during the initial phase, primarily because of losses suffered due to limited forex trading knowledge and improper trading.
High Volatility
With no control over macroeconomic and geopolitical developments, one can easily suffer huge losses in the highly volatile forex market. If things go wrong with a particular stock, shareholders can put pressure on management to initiate required changes, and they can alternatively approach regulators. Forex traders have nowhere to go. When Iceland went bankrupt, for example, forex traders holding Icelandic krona could only watch. The 24 hour / 7 day a week markets make it difficult to regularly monitor prices and volatility. The best approach is to keep strict stop losses for all forex trades and trade systematically through a well planned approach.
In Summary
A trading career in forex is viewed by many as an easy money making career when in reality it is quite difficult. Because it is a highly liquid, 24 hour, 7 day a week market that is easy to access, it is highly appealing to those who want to be their own boss with flexible hours to suit. It should be noted though that the high risk and sudden volatility changes that often occur can result in a short lived career as it has for many in the past.
Shobhit Seth can be contacted at: FuturesOptionsEtc
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