Advantages and Disadvantages of Forex Trading
Forex trading is a relatively inexpensive means of investing in currency. The biggest benefit is the availability of leverage. This type of trading allows you to trade with a small sum of money, but there are also risks involved. Currency valuations are not as obvious as those of stocks or commodities, and the fluctuation of currency values can be dramatic. Traders must be aware of all the costs that are associated with forex trading before entering the market.
The exchange rate for a particular currency is determined by the maximum amount of money buyers are willing to pay, and the minimum amount they are willing to sell. This difference is known as the bid-ask spread. A typical forex lot is one hundred thousand units of currency, but there are also smaller lots, called micro lots and mini lots, that can be traded.
The market is volatile, and the more liquid a currency pair is, the lower the volatility. However, there are some exceptions to this rule, such as the Canadian Dollar/Japanese Yen. Emerging market currencies have a greater risk of market turmoil. Therefore, traders should adjust their strategies to the risk level they are comfortable with.
Another advantage of forex trading is that investors can take advantage of interest rate differences between two countries. By buying a currency that has a higher interest rate, investors can profit by selling it at a lower one.