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

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 trading 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 is 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 are very 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 50× to 400× 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 of foreign exchange trading is that you are able to trade from the comfort of your own home, beer and underpants and all. Many online brokers offer you different payment methods, including PayPal, so it is very easy to get started in this business.

Trading hours are another good perk: unlike the stock market, you can trade in the currency market 24/5 (or even 24/7 if you trade cryptocurrencies), so you will not 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 FX market are its very high liquidity, the ability to profit both in 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 the 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 trading with a very low initial capital does not mean that you should — many novice Forex traders simply disregard this aspect, and as a result the most common cause of failure in newbie traders is a direct consequence of undercapitalization.

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

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Forex trading bears intrinsic risks of loss. You must understand that Forex trading, while potentially profitable, can make you lose your money. Never trade with the money that you cannot afford to lose! Trading with leverage can wipe your account even faster.

CFDs are leveraged products and as such loses may be more than the initial invested capital. Trading in CFDs carry a high level of risk thus may not be appropriate for all investors.