BIZ & IT

Forex – To Trade or Not to Trade: That Is the Question

9 June, 2011

Financial Freedom or a Headache?

Is Forex a real opportunity to earn money or just a legal way to rip people off?

Who is telling the truth? Whom should you trust? Should you trust anyone at all when it comes to money? Or perhaps it’s better to try and learn through personal experience, despite the bumps and bruises along the way?

These questions have been raised, are being raised, and will undoubtedly continue to be raised, as it is in human nature to question.

Those who actually make money from the market tend to keep a low profile and rarely disclose their earnings. In contrast, those who associate Forex with scams often express their frustrations very emotionally. Therefore, I propose that we weigh the pros and cons of the Forex market right now—a market that allows some to enjoy a lavish lifestyle while stripping others of everything they have.

Generally, Forex is understood to involve speculative activities, primarily through currency trading via dealing centers and, less commonly, through commercial banks. Hence, in this discussion, we will focus specifically on trading through dealing centers.

First, let’s understand how dealing centers operate and make money. They provide the opportunity for clients with small capital to trade on the international Forex market. They also offer the chance to trade contracts for difference (CFDs). Dealing centers earn money through the spread, which is the difference between the buying and selling prices.

However, not everyone who has ever traded on Forex is willing to return to it. This is because Forex is a very specific market. It does not forgive beginners who are driven by the obsessive idea of making quick money. To better understand this market, let’s outline its main advantages and disadvantages.

Advantages of the Forex Market:

  1. High Leverage: Leverage can go up to 1:500, meaning with just $100 in your account, you can trade $50,000. Impressive, right? But this can also be disastrous for beginners.
  2. 24-Hour Trading: The market operates 24 hours a day, 5 days a week. However, this doesn’t mean it’s active all 24 hours. You must know the best times for trading.
  3. No Additional Investments Needed: Charts and trading platforms are provided for free.

These benefits are heavily advertised by dealing centers, but is everything as rosy as it seems? Why are there so many skeptics comparing Forex to a casino?

Because alongside these attractive conditions for beginners, there are also significant drawbacks:

Disadvantages of the Forex Market:

  1. Unclear Quotes: Each dealing center can set quotes as they see fit, leaving traders to hope for their honesty. Hence, choosing a broker carefully is crucial.
  2. Lack of Market Depth Visibility: Forex traders cannot see market depth or volume. There is no order flow. Traders only have access to charts. This is a major disadvantage compared to the stock market. The “volumes” shown on Forex terminals are merely the number of ticks over a certain period.
  3. No Support or Resistance Levels: Forex does not hold support or resistance levels. Beautiful bases might be dreamed of, but you’ll never see them on the screen. This needs to be understood. It’s challenging to trade Forex with small stop losses since currency pairs lack smoothness.
  4. No Diversification: Currency pairs are highly interdependent. Even if you enter trades in thirty different pairs simultaneously, they will all move similarly due to high correlation.

In any venture, there are two sides. The disadvantages listed here shouldn’t scare anyone off, and the advantages are not intended to attract anyone to Forex trading. This post aims to highlight the potential pitfalls to consider.