In this article I’ll show you the pros and the cons of trading forex so that you can decide whether forex trading is for you, exclaims Markus Heitkoetter of Rockwell Trading.
What Are the Pros of Trading Forex?
The fascinating world of forex. You see, it’s super easy to find the pros because there’s no shortage of “Forex Gurus” out there telling you they’re the greatest thing ever!
Let’s cover some of the pros of the forex markets.
1. It’s Open 24 Hours
Well, the first one that everybody tells you is that it is open round the clock.
It’s not like trading stocks where you have regular trading hours and then a few extended hours. No, it means that you can trade it 24 hours a day through the business week. It is the market that never sleeps. Now, we are trading from 5:00 pm on Sunday until 4:00 pm on Friday and these are Eastern times. But as you can see, it is open all the time. And this is intriguing to many people because they have still a daytime job and then they want to trade at night or in the evening or early morning. And this is one first pros you hear often about the forex market.
2. “It’s the Most Liquid Market in the World”
There is another pro, this is where people say, “It is the most liquid market in the world.” What do they mean by this? It means there’s a lot of volume going on.
I found that average trading volume in the forex market is around $5 trillioneveryday.
Now, in comparison, the New York Stock Exchange is making around $160 to $200 billion. Its peanuts compared to what’s happening in the forex market.
This is why the forex brokers tell you, “Why wouldn’t you participate in the most popular market in the world,” right? The most liquid market in the world.
And if you’ve ever been caught in a trade that you couldn’t get out of, you understand what a plus it is to have a very liquid market.
3. No Commissions
What is another advantage here of trading forex? Well, you have absolutely no commissions. These days, as you know, commissions have gone away for trading stocks. They are still there when you’re trading options and when you are trading futures. So, of course, it is super attractive when forex trading says that there is no commissions, why wouldn’t you do this?
When most people start trading, they’re trading for growth typically due to their account size (or lack thereof). Because of this, doing anything you can to preserve capital (i.e., no commission) can be very appealing.
4. Free Tools
Brokers are telling you, “We give you free charts and tools.” You get calculators, you get charting software, you get everything for free. Now, again, right now, this is pretty much the standard. Most brokerages for stocks and options are also giving you free charts, watchlists, scanners, etc. But if you think a couple of years back, this is when brokers were still charging for everything from the data feed to additional features. Anyhow, with forex trading, it was always free, and it will always be free. Sounds good thus far, right?
5. You Can Start with as Little as $10
Let’s talk about the fifth advantage here. You can actually start with as little as $10. Can you believe it? Most brokers ask you to fund your account with at least $500 or $1,000, and if you want to trade stocks and options, it makes sense to start with around $2,000 to $5,000, right? Here you can start with only $10.
I Googled “Best Forex Brokers” and I found the minimum deposits for these brokers are $100, $10, $0, $200, $100—super easy to fund, and you’re getting a leverage of 500 to 1.
What does this mean? It means that if you put $100 in there, you’re getting $50,000 buying power. I mean, amazing, right?
What Are the Cons of Trading Forex?
It seems that just looking at this, there’s so many pros why would you not trade forex? Well, let’s talk about the cons here.
1. Foreign Exchange
First, let’s clarify what “forex” actually means: Foreign Exchange.
So you would think, like the New York Stock Exchange or the CBOE, the Chicago Board of Options, that there is an exchange, right? Here is the deal, and this is the kicker. Most people don’t know this, but there is no foreign “exchange”. So how are you trading them? Well, this is the deal…
2. You’re Trading Against the House
You are not trading against other traders. You are trading against the broker.
Yep, that’s it. You are trading against the broker, and the broker is trading against you because there is no foreign exchange. Now, this is why here in the United States, forex trading has almost been banned.
3. They are Not Trusted by the CFTC
There’s this commission we have here in the US called the CFTC, short for the Commodities Futures Trading Commissions. It’s a government institution, and they actually warn and protect us against foreign exchange currency fraud.
On the CFTC’s own website, they have an article titled Beware of Foreign Currency Trading Frauds, and here is a highlight from the article:
“Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted—stolen—for the personal benefit of the con artists.”
Let’s go back here. It’s the most liquid market in the world. However, again, there is no foreign exchange, right?
There are no commissions, no fees, but these forex brokers, they actually sponsor race cars according to a press release from McLaren.com. They’re also sponsoring RoboMarkets, which is another forex broker.
You might say, “So what? They’re sponsoring a few cars, who are watching Formula One anyhow?” Well, keep this in mind, sponsors are sponsoring Formula One with $30 billion.
You may also be thinking, “Well, big deal. I mean, here in the US we have football, right?” I mean, we have 32 teams in the league. However, the NFL sponsorship is only $1.5 billion. This must be why forex brokers are not sponsoring the NFL. I mean, who watches NFL right? Kidding, but you get the idea. They are sponsoring race cars, which is $30 billion, 20 times as much as the NFL.
How They Make Money?
You might be wondering if there are no commissions, if there are free charts and tools, if everything is free how do they make money? How can they sponsor a billion-dollar industry?
1. They Steal Money from You
Well, we just talked about it. What did the CFTC say? They steal money from you. You are trading against the broker and it’s like playing against the house. In Vegas, when you’re playing against the house, who wins? The house always wins.
2. It’s Addicting
It’s also open 24 hours a day, just like Las Vegas. I mean, why would they close Las Vegas? Same with the forex market, it’s because it is a billion-dollar money-making machine.
You have to be very careful, especially when it is open 24 hours, it can lead to addiction. Same as Vegas here, because, hey, let’s just pull on the slot machine one more time.
It’s the most liquid market in the world, but it doesn’t matter because you’re not trading against other traders. Even if there are millions and billions of traders in there, you’re trading against the house.
3. They Trick You with Free Incentives and Low Buy-In
There are no commissions, of course, but why would they charge you commissions when they steal your money? I mean, we have just seen it according to the CFTC. These are not my words, it’s their words, and they are an official government’s institution.
They offer free charts and tools but the same idea here. Why charge you for these when they just steal your money. You see in forex, you can start with as little as $10-$100, as I mentioned earlier. However, with stocks and options, as I said, I recommend that you have $2,000 to $5,000 here. This is where we compare it again to Las Vegas. In Las Vegas there are 164,000 slot machines, right? You know, the slot machines where you only pay $0.25 to get started here?
On the other hand, you have 600 poker tables. Why? At the poker table, your minimum buy-in is anywhere between $30 and $100. You get the idea, right? I mean, this is why forex is like a slot machine.
And this is why they keep the entry-level low because they even let you fund an account with your credit card.
I promised you, first of all, that this will be eye-opening. Should you be trading forex? Well, keep in mind, you are trading against the house.
There are a few brokers that let you trade against other traders, but most brokers out there are taking the other side of your trade. They are providing you the quote. This is why they give you free quotes and free tools. Remember, there is no foreign exchange. Keep this in mind.
The key questions here are…
Can You Make Money Trading Forex?
Maybe. There are some traders who are really, really, really good, but the odds are against you. There are people who come back from Las Vegas, and they make money every single time they go to Vegas but think about the majority. What happens to the majority of people when they go to Vegas? They lose money, right? So, what should you do?
Should You Trade Forex?
Well, here’s my advice. If you want to trade, I would say trade stocks and options and here’s why:
You are trading against the house.
I cannot say this often enough, but I hope that I can do this until it sinks in, until you realize that when trading forex, you’re trading against the house.
I hope that this is helpful and tells you a little bit behind the scenes of what is happening in the forex market. It is the biggest market in the world, a $5 trillion market, compared to the US stock market worth $200 billion.
Learn more about Markus Heitkoetter at Rockwell Trading.