The Risks and Rewards of Forex Trading

Posted by forex on August 20th, 2010

Like any other market, risks and rewards are involved in the forex trading. With the daily turnover running over a trillion dollars, forex market is the largest market in the world. Trading in the forex market can make you rich but not without any risk. Forex market is a highly volatile market, as one can?t predict when one currency will go up or down. So it is advised to new comers to be cautious.

However there are benefits of forex trading.

Rewards

1.                  Forex market is a 24 hour market, except for the weekend, trading is possible round the clock. Market starts on Sunday, 3.00 PM EST, when operations in New Zealand are commenced, and terminates on Friday 5.00 PM EST, when San Francisco market operations are over. In one or the other time zone trading is possible. It gives convenience to the traders to choose their own time.

2.                  High liquidity is another benefit of forex trading. It is estimated that every day trade volume exceeds one trillion dollars. Such a huge volume of trade makes it difficult to be manipulated, and in turn gives stability to the market.   

3.                  Ease of operations, you can easily open and close your transactions.

4.                  High leverage is another benefit of forex trading. Some brokers are offering margin of only 0.25 % of the position. For an example, your broker is allowing 100:1 leverage, means you need to have margin of 100 $ only to open 10000$ position.

5.                  Low transaction fees are another benefit of forex trading. There are many brokers allowing trade without any commission. Only cost involved is spread (The difference between the sale price and purchase price), and it is sometimes as low as 1 pip.

6.                  You don?t require huge investments to start forex trade, you can start trade with 100$. It depends upon your broker, how much leverage is offered.

7.                  Most of the trade is done in seven major currencies and this allows us to understand market easily.

8.                  Whether you are at home, or travelling, you can trade easily, anywhere trading is the another big advantage of forex trade.

We have seen the benefits of the forex trading.  However trading in the forex market is not risk free. We will see what are the risks involved in the forex market.

Risks

1.                  You need to be cautious while selecting a forex dealer. Forex market is a decentralized market unlike regulated stock markets. Currency rates offered by different forex dealers differ a lot. You need to check background before dealing with any forex dealer. Normally reputed forex dealers are associated with large financial institutions. This is necessary to protect you from any forex scam.

2.                  Forex market is highly volatile and nobody can predict exchange rates will go up or down. Unexpected rise or fall in the currency rates can cause big losses to you.

3.                  Credit risk is also involved in the forex trading. If the party you are dealing with   does not honor the debt, when you close the deal. If the institution you are dealing with goes bankrupt you may lose your money.

4.                  When you open a position with high margin, you are taking risk of making big losses also.

Although there are many benefits in this market, it is advised that if you don?t have proper knowledge of forex trading, you should not venture into this market.