Investment in the forex market with advantages and limitations

In this article, you will learn all the details of investment in the forex market for maximum profit along with various advantages and disadvantages of investment in the forex market.

Forex or foreign exchange market offers a big platform for investment for those who wants to earn huge money in small time. Forex market is the online trading of the currencies where you simultaneously buy one currency and sell the other.

What is forex trading?

In simple language, forex market is the global decentralized market where buying and selling of the foreign currencies is done simultaneously. This trading is done through the financial centres present throughout the world which serve as anchors for the trading of the currencies. The main advantage of forex market is that trading can be done anytime inline except on the weekends.

Forex market differs from the traditional market where trade takes place. Forex market is well connected worldwide through telephone and computer screens and most of the forex trading is done online. Although financial centres are present across the world but there are three major centres where majority of the trading takes place. United Kingdom, United States and Japan are the three major functional centres for forex market.
The forex market enjoys the status of most liquid market in the world. Major traders in the forex market include large banks, currency speculators, corporations, financial institutions and retail investors.

Basic terms used in the forex market

Before investment one should have the basic knowledge of the technical terms used in the forex market. Here I am defining some major technical terms used in the forex market. Just go through them to have an idea of these basic terms used in the forex market.

Exchange rate
The exchange rate is the term to define the value of one currency that is expressed in the terms of another currency. Lets have an understanding of this term with the help of an example; if EUR/USD is 1.320 then it means 1 Euro is worth US$1.320.

Currency pair
This is the pair of two currencies in the forex market that make up an exchange rate. When one currency is bought in the forex market, the other currency is sold in the forex market, and vice versa.

Base currency and counter currency
The first currency in the currency pair is called as the base currency and the second currency in the currency pair is called counter currency. The counter currency is also called as the terms currency.

ISO Currency Codes
These are the codes given by the ISO for the currencies traded in the forex market-
  • USD - US Dollar

  • EUR – Euro

  • JPY – Japanese Yen

  • GBP – British Pound

  • AUD – Australian Dollar

  • CHF – Swiss France

  • CAD – Canadian Dollar

  • HKD – Hong Kong Dollar

  • SEK – Swedish Krona

  • NZD – New Zealand Dollar

  • KRW – South Korean Won

  • SGD – Singapore Dollar

  • NOK – Norwegian Krone

  • MXN – Mexico Peso

  • INR – Indian Rupees

  • Market maker
    The pricing and the liquidity to the forex market is provided by the market maker for a particular currency pair. The market maker always stands ready to buy that currency at the quoted price. There is always a conflict of interest between the trader and his market maker if the market maker decides to keep the trader's position without offsetting it with other market participants. In such situation, the trader's profit is the market maker's loss.

    Electronic communication network brokers
    Forex electronic communication network (ECN) brokers don't possess any dealing desk but offers a platform or marketplace where other market makers, banks and investors or traders can enter in the competing bid in the forex market. All the trades are done in the name of the ECN broker and hence provide complete anonymity to the investor.

    Margin is defined as the minimum amount required for opening or maintaining a position in the forex market. Margin is of two types; free margin and the used margin. Free margin is the total amount which is available for the opening of new position in the forex market whereas used margin is the amount that is available to maintain the open position.

    Leverage is the unique and exciting feature of the forex trading. Leverage can be defined as the ability of the investor to gear his account into to a position greater than the total account margin. For example, if a trader has $100 of margin in his account and opens a $2000 position then he leverages his account by 200 times, or 200:1.

    How to gain profit in forex market?

    Investment in the forex is always considered as a risky affair and generally investor has a fair chance of to be a looser instead of a gainer. But if an investor follows some simple principles and rules of the forex market then, he can increase his chance of earning through the forex market. Basically there are only two main principles of the investment in the forex market and an investor should keep them in mind while investing his money in the forex market.

    Effective planning before investing in the forex

    Planning is the core principle of the investment in the forex market. Before planning investor should keep his emotions aside and should make a proper plan for better money management strategy. An effective investment plan should consist of some basic things which include reason for investment, proper money management, stop loss point and a profit taking level.

    Understanding of forex market

    This is another important rule of the investment in the forex market. Investor should have thorough knowledge and understanding of the trend of the forex market. The basic strategy of the investor should that when he feels the market is going to be bullish than he should plan to go long. On the other hand if the investor feels that market is going to be bearish than he must plan to be short.

    Benefits of investment in forex market

    The forex market offers a great platform to earn huge profit in shorter span of time. List of the benefits of the investment in the forex market is very large but here I will give you a brief detail of all the possible benefits of the investment in the forex market.
  • The investment in the forex market is totally free from the commission so all the profit earned from your investment is just yours.

  • There is no middleman in the forex trading. This enhances the transparency in the investment in forex as all the profit is directly handed over to the investor.

  • There is availability of the leverage account also in the Forex. Due to leverage, the investment of the investor is worth 100 times more than the invested amount.

  • A person can invest as low as $50 to as high as $100000 in the forex market. So forex offers the choice to the investor to invest the money as per his pocket is allowing him.

  • Forex market gives you the freedom to see your earning at any time instantly. For this reason forex market is always considered as spot market. Due to such liquidity in the forex market it enables the investor to enter and quit from the market from anytime and at any position.

  • The last main advantage of the investment in forex market is that trading in the forex market is available online. So an investor can trade in the forex market even from his home at any time which suits the investor.

  • Disadvantages of investment in the forex market

    As every investment has its advantages and disadvantages so it becomes mandatory to know the disadvantages of investment in the forex market after knowing the advantages of the same. Here are the major disadvantages of the investment in forex market.
  • The major disadvantage of investment in forex market is that first it requires the thorough knowledge of the time as without completely knowing the market completely can result in a huge loss to the investor.

  • For every winner in the forex market, there always exists a looser. So one must understands that to someone get rich, another has to loose money in the forex market.

  • Majority of the trade in the forex market is done by the dealers and the large organisations. These organisations trade at whole prices whereas investors trade at a retail price.

  • For smaller investors, sometimes it become difficult to challenge the large organisations which start with a lower entry point and sell more profitably.

  • There is fair amount of risk that an investor may choose an inexperienced broker as there are lots of brokers are present in the forex market. This can result in the huge loss to the investor who invests his money in the forex market through these brokers.

  • Conclusion
    Like any other investment, forex market has also its own advantages and disadvantages. The first prerequisite to make successful profit through investment in the forex market is that the investor should have a thorough and complete knowledge of the forex market. There are lots of investors in the forex market who are daily making big profits by making intelligent and smart investment.

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