Forex or the foreign exchange market is the largest financial market in the world. It involves exchange of a nation’s currency with that of another. Millions of people are involved in this trade. If you’re interested in investing your money in forex trading you should know the benefits and the risks involved in it.  

Benefits of forex trading 

There are many advantages in forex trading. Some of these are: 

• Unbound time limit: Forex market is open for 24 hours a day. It opens on Sunday evening in Australia and closes on Friday in New York. So you can trade any time in any part of the world.

• Low transaction cost: You don’t have to pay any commission to the brokers. You only have to bear the cost of spread, which is the difference between your buying and selling cost.

• High liquidity: It is the most superior liquid financial market in the world. More than $3 trillion  are transacted everyday. This allows the traders to cash in and cash out their capital easily. It also ensures stability of price and thus better trade is executed.

• Leverage trading: The forex brokers allow the traders to do trading using leverage. Using leverage a trader can trade more money on the market than he actually has in his account. The brokers offer a trade margin of 50, 100, 150, or even as high as 200 to 1 of trade margin. Say, for example, you want to trade at 100:1 leverage, you can trade on the market for every $1 that is in your account. This means you can do a trade of $100,000 using only $1,000 of capital.

• Low investment: Compared to other financial market, the forex market is the place where you can start trading with less capital. Depending upon the leverage offered by your broker, you can keep your investment very low. This reduces the risk of investing more money and losing it.

• No global boundary: As this trade has no physical boundary, the only thing you need in this trade other than your money is an internet connection. If you are a frequent traveler you can still continue with your trade through the internet.

Risks in forex trading 

Forex trading also involves certain risks. Some of these are: 

• Unbound time limit: As the trade is open for 24 hours a day, sometimes it become difficult for a person to keep track of the market for 24 hours. In this situation, you can take help of a professional broker, who will keep you updated from time to time about the market rate fluctuations and will also advise you when to or when not to trade.

• High leverage: Offer of high leverage by the brokers is no doubt an advantageous aspect. But, it also means involving a high risk if there is loss.

• Risk in interest rate: Your expected profit or loss in a transaction may vary when a discrepancy arises in the interest rates between two countries, represented by the currency pair in a forex quote.

• Risk in exchange rate: You can incur heavy loss if there is fluctuations in currency price during a trading period and prices fall rapidly. You can reduce this risk by using stop loss orders. Stop loss order determines closure of position at predetermined currency price, thus, limiting your amount of loss. Stop loss order can be used simultaneously with limit order, which specifies the closure of transaction at a predetermined profit.