Advantages and Disadvantages

Advantages

Liquidity

As the Forex market is so huge it is very liquid, with plenty of buyers and sellers. This means that you are highly unlikely to get stuck with untradeable assets, especially if you are dealing with the most popular traded currencies.

A 24 hour market

Unlike equities, which are usually traded within market opening hours, Forex trading goes around the clock. Traders can react to new and information as it breaks, rather than having to wait until the market opens. You can get in and out when you want to. This is advantageous to those who want to trade intra-day, end of day, or at the end of their 9-5 work day.

The global Forex market opens early on Monday morning in New Zealand, and is constantly open and liquid 24 hours a day all the way to the New York close at 5 pm on the Friday.

Execution Quality

Because the market is highly liquid, most trades can be executed at a single market price.

Leverage

Often Forex firms permit experienced investors to take out foreign exchange positions without having to put up the whole amount of capital. This can allow traders to take more lucrative positions, although of course if they do call the market wrong then the potential losses are also larger.

Forex investors are often permitted to trade foreign currencies on a highly leveraged basis. For example some firms allow a position of up to 200x the original investment. An investment of £1,000 would enable you trade up to £200,000 of any particular currency.

A 'purer' market

The Foreign Exchange market is one of the purest markets in the sense that the potential for profit exists as long as there is a movement in the exchange rate.

Currencies are traded in pairs. For each transaction one currency is sold and another is bought. One side of this bargain will gain, and of course the other will lose. But the potential for profit is always there.

As the market is made up of so many players it is also harder for one organisation or trader to influence it.

Disadvantages

Leverage

Taking out leveraged positions means that you could lose more than your initial investment. With sensible risk management strategies this can be mitigated, but trading Forex is not for the novice investor.

Complex and fast moving

There are a large number of factors that can influence foreign exchange rates including hard to predict factors such as central banks trying to manipulate interest rates. Small changes can also have a big effect in this 24 hour market.