Advantages and disadvantages of Forex

Trading the Forex market has some advantages and some disadvantages compared to other markets.

Normally the webs and businesses related to Forex try to exalt those supposed advantages in an exaggerated way.

However the truth is that some of the supposed advantages are not what they seem to be.

This is not to say that the market is bad or good but only that there are some preconceived ideas that do not match reality.

One introduction to this article is the one I wrote dedicated to the advantages of futures over other instruments.

Let us have a look to the supposed advantages of the Forex market:

Market without commissions

Many of the numerous brokers in the sector do not charge commissions when the traders buy and sell. However many of the forex brokers operate in an ECN model in which they charge commissions.

It is true that there are not other commissions related to the markets like we can see in stocks and futures. That I true.

However, does this mean that trading Forex is cheaper than futures, stocks or other assets?

It does not need to be like that.

The Forex brokers that offer trading without commissions are in reality charging you those commissions in the spread they offer for the different assets.

In other words you may not pay 5 USD for buying a lot in the EURUSD (100k) but for sure you are paying a bigger spread than you would pay otherwise.

We are talking about differences in form not in essence.

Flexibility when trading

This is truly an advantage that the Forex market can boast about, especially when compared to markets like futures.

The fact is that the Forex market permits trading with 1,000 units without any problem, something that the futures markets cannot match.

This is a huge advantage for those who have small accounts and cannot afford to trade whole lots.

This is a critic issue for money management.

Big leverage

This can be seen as an advantage at first sight, specially for novice traders since they think that they can trade 200,000 with a small account and become rich soon.

The reality is other, since that leverage also means that we can lose our accounts much quicker, what occurs in most cases actually.

In fact it is better to trade with small leverage.

There is no way of cornering such a big market

This is something that I have seen in some places.

According to some people the forex market is so vast that nobody can control it.

It seems to be true, at least in part.

The market will eventually go where it has to go.

However the cases of manipulation are huge in this market.

Remember the case of the Forex black Thursday when the Swiss Central Bank “cornered” the market surprisingly making thousands of traders bankrupt in a matter of minutes.

Not to mention that the supposed depth of market of many brokers is not of billions but of much less.

Therefore we are talking about a quite limited market in which you are trading against the brokers in most cases.

In other words, you are not trading the interbank market

Forex market size

Supposedly we are talking about the biggest market in the World.

This is something I already explained in the article “What is Forex”.

You simply need to know that when there are important news the brokers increase the spread by 10, 20 or 40 pips to understand that the supposed depth of market is not such as we are told.

The market works 24 hours a day five days a week

This is truth since if we live in, for example, Spain, we could start trading the market since the Sunday evening until the next Friday night when the market closes in the American session.

In theory it can have some advantages if you do not want that the market closes every night as it occurs in futures or stocks. This way you can protect yourself against some announcements like dividends, for example.

This has some truth in it but we have to recognize that in Forex we can have dramatic moments when there are some macro announcements which make it useless the fact that the market is open anyway.

For instance, talking about the case of the Swiss Franc, it is useless that the market is open if nobody buys my orders and I lose more than 1,000 pips in one trade because there is no volume at all.

Therefore we can see we cannot escape the tricks of the markets so easily.

Regarding the possibility of trading at night as an advantage I can tell you that if you cannot win trading by day simply forget to win by trading at night because it is the same.

Nonetheless there are many traders who are attracted to this market for that simple reason because they like to trade when they are at home in the evening after a long day of work.

We can win when the market rises and when the market falls.

Yes, it is true; we can win in the long and short side.

We can be bullish or bearish in the dollar, for instance.

In stocks for instance, and in most cases we can only be bullish.

Although I warn you: winning using the short side is not as easy as it seems.

Real Forex advantages?

As you can see things are not as good as they seem at first glance since the Forex market is much more complex than it seems.

In reality it is very difficult to win in a normal forex broker for a normal forex trader, I mean to win in the long-run.

What do you think?

Is it better the Forex market, the stock market, the futures or the binary options market?