We’ve all seen the commercials for trading forex online or through an app. You can make thousands of dollars in a short period by trading Forex. Some of these ads even try to convince you it’s easy. But is it? Forex trading can be complicated and risky, which is why we’ve put together the list below to help you decide whether you should be trading Forex.
What is Forex Trading?
Forex trading is when a trader buys a currency and sells a different one, and the exchange range fluctuates according to the demand and supply. The trade for currencies takes place in the foreign exchange market that is open from Monday to Friday.
The Foreign exchange market is open 24 hours a day. All currencies are traded over the counter (OTC), which means there are no physical exchanges, and a worldwide network of financial institutions and banks oversee the operations. As a result, the vast majority of trading in the market is between institutional traders.
Reasons Why you Should not Trade in Forex
You don’t have sufficient funds in your account and want to invest in Forex to make a profit
Solid profits cannot be earned without a solid investment, and the same is true for the Forex market. You should stay away from the Forex market if you’re not in a stable financial position.
You are not good at handling losses
The activity that takes place in Forex is largely based on speculations, as you are dealing with several variables. In most situations, trades have to guess where their investment will result in a profit or a loss. However, you need to be prepared as not all trades will result in a profit, and if you cannot accept that fact, then Forex trading isn’t for you.
You don’t like taking risks.
Take risks is the core of the Forex market, as traders cannot make huge profits without taking calculated risks. So, if you have a hard time taking risks because you fear you might face losses, then Forex trading is not for you.
Management of Time
Time management is crucial in trading, but it often depends on your trading strategy. However, all types of trading strategies require a significant amount of time at the screen, analyzing all the data. If you already have a full-time job, then it’s best not to trade, as you won’t give enough time to trading.
Changing Conditions in the Forex Market
The Forex market is a complex place, and unfortunately, traders, most beginners, do not understand that. Moreover, the market conditions can change instantly, and usually, traders are not prepared for that. So make sure you have all the right trading skills and flexibility before you enter the Forex market.
Overtrading
Overtrading is a situation that most traders encounter; they either trade too often or too big. Overtrading is the main reason why most Forex trading fail, as they have unrealistic high-profit goals, insufficient capitalization, and market addiction.
Cost of Trading Forex
The cost of trading is to be paid by traders if they are to trade in the Forex market. There are also optional costs for trading tools such as faster connection, technical analysis, news services, and much more. There are some mandatory costs as well, as for every trade, the trader needs to pay a certain cost or a specified commission to a broker.
However, these costs are low, but the problem is that most traders ignore these costs, and this becomes a hindrance for them in the future. For some traders, it’s about their inability to make profits, but their underestimation of costs is what leads them to failure.
Commission in Forex
There are two types of commissions in the Forex Market:
- A fixed broker fee: In this model, a broker will charge a fixed sum, which won’t be related to the volume and size of the trade. A broker may charge a fee of $1 per transaction, regardless of the trade size.
- Relative Fee: This is the most commonly used way of calculation commissions. The amount charged to a trader is based on the size of the trade, so for example, if a broker charges $X per $ million trade volume, it means the bigger the volume of the trade, the higher the cash value.
Overnight Costs
When traders hold an overnight position, there is a cost that they have to pay, and it is called ‘Overnight Rollover.’ Every currency that a trader buys or sells comes with an interest rate, and the difference between the interest rates of the currencies that are being traded will be the Overnight Rollover cost. These rates are decided by the Interbank, not by brokers.
An example of this can be that if you invest in the GBP/USD currency pairing, the Rollover cost will be the difference in the interest rate of the two currencies.
If the British Pound had an attached interest rate of 5 % and the US Dollar had an interest rate of 4 %, the trader would receive a $1 payment since they were buying the currency with the higher interest rate. On the other hand, if the traders were selling the currency that had a higher interest rate, then they would need to pay a cost of $1.
Data Feed Costs
Aside from the costs of trading, other costs need to be factored in by traders, especially when they are calculating their profits. Data feeds provide valuable data to traders and gives them an insight into the Forex market. Traders use this information to make important decisions:
- When to enter and exit the market
- How to manage an open position
- Where to set stop losses
The cost of the data feed is usually fixed and is charged monthly. However, there are several data providers in the Forex market, so the cost varies.
Other Costs
Other costs that traders may have to pay for are magazine subscriptions, television packages, which allow non-stop access to finance-related channels. There is also a cost for tutorials, exhibitions, and shows.
Forex Trading PIP Spread
The spread measurement is done in PIP, a small movement in the value of the currency pair price, and the last decimal point is 0.001. However, the Japanese Yen is the only currency where the decimal point is 0.01. Therefore, a wider spread indicates a greater difference between the two prices.
A wider spread indicates high volatility and lowers liquidity, whereas a lower spread indicates lower volatility and higher liquidity. Therefore, when trading a currency pair with a tight spread, the trader will pay a spread cost.
While trading Forex, the spread will either be fixed or variable. The spread for forex currency pairings is variable, so when the price of the pairing and the bid change, the spread changes.
Unpredictable
The Forex market is an unpredictable and, at times, unforgivable place. To become a successful trader, you will need to take calculated risks and a clear strategy. In this article, we have discussed several reasons why you should not trade in the Forex market, and we have also discussed the costs that traders need to pay while trading in Forex.
All the information in this article is relevant; read it up, come with a better strategy, and if your circumstances or financial situation is not good enough, do not trade in the Forex market.