Last Updated on July 4, 2023 by Flavia Calina
Forex trading is one of the most popular forms of trading in 2023, and many people speculate on the price movements of currency pairs in hopes of making a profit in the financial markets. If you are eager to start trading currency pairs, you can visit Saxo Forex broker to open a live account. If you would like to learn more about the benefits and risks of forex trading, you can read on.
Benefits of trading forex
There are many benefits of trading forex, as it is the largest and most liquid financial market in the world. They include high liquidity, long market hours, and flexibility in trading with the use of leverage. Let’s look more closely at these benefits and why forex trading is so appealing to so many traders.
High liquidity
The first benefit of forex trading is the high liquidity of many currency pairs. In particular, major forex pairs are very liquid, and there are a lot of transactions going on daily. This makes it easy for traders to buy and sell their desired currency pair in their desired quantities. The high turnover also means the forex market is always fluctuating, with price movements steadily moving. This creates opportunities for traders to take advantage of.
Long market hours
The forex market is open 24 hours a day, from Monday to Friday. It operates in sessions, with the first session opening in Sydney, Australia, on Monday morning local time and the last session closing in New York, the United States, on Friday afternoon local time. The other two sessions are the Tokyo and London sessions, which also open and close on weekdays.
These trading sessions overlap, and traders can participate in any session they wish regardless of their location. This means that for many traders, accounting for time difference, the forex market is open from Sunday evening or Saturday morning as well. Though the forex market is closed to retail traders on weekends, this is a large enough window for traders to jump in and out of the market to take advantage of the opportunities that present themselves.
Use of leverage
The third benefit that makes forex trading appealing is the use of leverage for traders. Leverage is a tool that allows traders to control a larger position with a small amount of capital at the outset. As movements in the forex market are very small, many traders use high leverage to gain large potential profits. However, leverage goes both ways – if the markets do not perform as anticipated, traders may also incur a large potential loss. Traders should therefore keep this in mind and understand how the market and trading works before using high leverage.
Risks of forex trading to be aware of
Having covered the benefits of forex trading, it is also important that traders understand there are risks involved in the activity. The forex market can be a volatile place, and there are additional risks such as market and operational risk.
Volatility
One of the main risks of forex trading is the volatility of the market. The forex market is very volatile, and prices can change rapidly in small timeframes in response to political and economic events. Traders can incur significant losses when their currencies depreciate rapidly.
Leverage risk
As mentioned, leverage is a tool that can allow traders to control a larger position than they would otherwise be able to with a small amount of capital at the outset. Leverage can amplify profits, but they can also amplify losses and increases the risk of margin calls. Traders should employ leverage carefully, especially novices and beginners who may not be proficient in predicting market directions yet.
Market risk
Market risk is the risk that prices will move against your position. Broadly speaking, all forms of trading carry market risk, as the financial markets are ultimately unpredictable, and there is no way to guarantee profits when trading or investing. Forex traders can make their most informed decisions, but currency prices may still go against them. In this case, they will also incur a loss.
Operational risk
Finally, there is operational risk in forex trading. This is the risk of losses due to errors or system failures, and it often stems from issues with the trading platform provided by the broker. It is essential that you work with regulated brokers that have efficient and user-friendly platforms with low latencies to minimise slippage and failed trade executions. You should also ensure that you have strong Internet connectivity when trading.
Common mistakes traders make when trading forex
There are some common mistakes that many forex traders make, regardless of skill and experience level. Below, we outline some of them. Hopefully, you will not make these mistakes, or at least find a way to learn from them if you have been making them.
Lack of understanding of how the market works
One of the biggest mistakes traders make is not knowing how the forex market works. They do not know how trading works, and what moves the price of the market, or when the forex market is open or close. These are basic mistakes that no trader should be making. However, there are many instances when traders are just too excited to start trading that they dive in without learning anything about the market. This is a terrible way to trade, and traders can almost be certain they will lose money when they take this approach.
Overtrading
Some traders, when they first make profits in the market, become over-excited and begin overtrading. They start placing more trades than they can adequately manage, which can lead to an inability to monitor price charts. When traders overtrade, they are also prone to making mistakes because of the hurried decision-making process. It is essential to think through each of your trades and not dive into the deep end blindly, in hopes of making as many small profits as you can through placing many trades.
Lack of risk management
Another mistake traders make is not having a proper risk management strategy and not implementing any techniques to limit potential losses. Some simple strategies include using stop-loss orders and position sizing. When there is no risk management strategy in place, the markets moving in the wrong direction can lead to significant losses.
Letting their emotions overrule their logic
The fourth mistake that traders make is letting their emotions overrule their logic when making their trading decisions. Many traders let their emotions get in the way when they enter the forex market, including letting fear, greed and impatience drive their decisions. This can lead to illogical decision-making, which can lead to losses.
The bottom line
Forex trading can be an incredibly lucrative endeavour when done right. However, there are also risks that come with the activity. Traders should continually do their research and refine their strategies when trading, and they should choose currency pairs that they are comfortable trading. They should also use leverage with caution, just in case markets move against their predictions. If they are in doubt, they should check out free resources online or consult with an investment professional to make sure they are on the right track.
