UNDERSTAND THE ADVANTAGES OF FOREX TRADING AND KNOW THE RISK
Forex is one of the unique short-term investment instruments. Unlike other instruments such as gold, property, stocks, and mutual funds, forex has the highest level of risk, as well as the advantage of being able to make a lot of money in the shortest time. What are the advantages of forex trading and the risks of forex? Check out the following discussion.
Advantages of Forex Trading
Forex, also called Forex, is one part of investing or trading which is known to have risks for traders who are involved in it. However, this does not dampen the interest of traders to carry out forex trading activities.
There are various reasons why many people are now looking to forex trading as an additional source of income or a main job. Forex is indeed a type of instrument that attracts the attention of many parties, both investors and the public in general. Here are the advantages of forex trading compared to other investment instruments.
Time Flexibility
The forex market is a market whose transactions are carried out on a global scale. Unlike other financial markets, such as stocks, which are only open during normal business hours, the forex market is open 24 hours a day, only on Saturdays and Sundays, the market is closed. With open trading hours 24 hours non-stop, 5 days a week, meaning, as a forex trader, you will be able to set your own trading time.
If you prefer to work in the morning because you have another main job; it doesn’t matter, you can trade forex at night. Or vice versa. You can trade forex during the day when you have busy work at night. Or if you want to specialize in trading only at the most profitable times, then you can choose the best forex trading times and hours.
Place Flexibility
The first advantage of forex trading is that it is flexible. Forex trading is an activity that can be done online. Transactions can also be carried out via computers, laptops, tablets, or smartphones. Traders can also make transactions with the application provided by the broker.
With the internet, forex trading is now very affordable and can be done anywhere. This is the first advantage of trading forex, where the conditions are only:
- Have hardware such as a computer, laptop, tablet, or smartphone.
- Have installed the application provided by the broker for trading.
- Having an internet network that is adequate to conduct online transactions.
- Affordability
In forex trading, there is a margin and leverage system. This system allows the broker to lend funds in proportion to the guaranteed funds provided by the trader. Leverage allows you to open trade positions greater than the power of your money should be. This means that leverage can provide a greater return potential.
For example, with leverage of 1:100, a trader only needs to deposit a margin of US$100 to be able to trade with a power of US$10,000. These two facilities allow you to start trading forex with small capital. You also do not need a large capital to start trading forex.
If in the past to be able to transact forex, a minimum of tens of thousands of dollars was needed, now it is enough with a capital of US $ 10 to be able to do forex transactions. There are even some brokers who provide capital for free even if it’s only US$5 or US$10. Even though it’s not a big amount, it’s pretty good, isn’t it? This is the fourth advantage of forex trading.
Liquidity
The next advantage of forex trading is still related to time flexibility, but in this case, it is seen from the level of liquidity or the availability of funds from the forex instrument itself. The level of liquidity certainly affects the flexibility of transactions.
The forex market is the largest and most liquid financial market. The forex market has a very high level of liquidity or availability of funds. This liquidity figure reaches up to an average of US $ 5.3 trillion per day. This data is released by the Bank for International Settlements (BIS), an institution that oversees the world’s banks.
Effectiveness
Apart from leverage, there is one more factor that makes forex a suitable instrument for investors with limited capital. Business competition between brokers also makes trading commission fees lower and more competitive. Generally, the fees charged by forex brokers are spreads. Is the difference between the bid and ask price?
The spreads in the forex market themselves also tend to be much less or tighter than the spreads applied to stocks. This makes forex trading an effective way of investing. With the internet, we also have the freedom to choose a forex broker with the lowest trading fees or spreads with the most advanced trading software facilities as our liaison with the forex market. Interesting right?
Profitability
Forex trading is done in currency pairs. For example in the EUR/USD pair: a “buy” transaction means buying Euros and selling US Dollars, while a “sell” transaction means selling Euros and buying US Dollars at the same time. When predicting that the Euro will weaken and the USD strengthen, the trader will open a “sell” trading position.
On the other hand, when predicting that the Euro will strengthen with the USD weakening, the trader will open a “buy” trading position. Thus, forex traders can benefit, both when a currency weakens or strengthens. Even if the position is at a loss, you can hedge to lock in your losses.
Hedging itself is a locking strategy, which means that if the price moves in the opposite direction to our prediction, then we will immediately open a new position that is opposite to the initial position, without closing the transactions that we did previously. With this hedging system, losses during transactions can be minimized.
Forex Risk
In addition to the various advantages or advantages that you can feel from forex trading, this activity also carries a high risk. In the investment world, there is a law that applies, namely the greater the potential profit, the greater the risk. This is called Risk and Reward which is directly proportional. Forex itself is a High-Risk High Gain instrument.
Forex is the type of investment that has the highest level of risk. Often various sources state, that when compared to other paper assets, such as deposits, bonds, mutual funds, and stocks, the potential for forex profits is higher in the short term, but also has the highest risk.
According to the results of several studies conducted by the French forex regulator AMF, 90% of traders end up losing. This means that only 1 in 10 people are successful in forex trading. Scary? Here are the facts.
What can be concluded from the facts above? As a forex trader, you must reflect on this fact. we can conclude like this:
- Forex trading has a low probability of winning
- Forex trading is not easy.
- Traders need to understand forex risks before jumping into them.