Demerit of Forex Trading

No doubt forex is an amazing means to earn handsome amount of money. Despite that it has some mentionable demerits as are follows:

Brokers: Retail traders must use a broker rather than dealing directly with the interbank market. The brokers are the counterparty in all transactions and are effectively making the market. They can, therefore, broaden spreads or even deny to trade during volatile trading conditions. In order to avoid dealing with brokers an alternative to forex is to use futures.

Spreads: Since the retail trader has to use a broker to trade, they cannot deal at the interbank rates. A broker will normally quote a fixed spread of 3-20 pips depending on the currency pair. The underlying interbank rate might be as small as 1 pip.

Leverage: With large leverage available to forex traders the peril is that positions which carry too much risk for the account size can be taken on, leading to margin calls. Effective money management rules must be attached to. Nowadays, one can leverage his investment with an online forex broker by 200, or even 400 to 1 and this creates huge profit potential. But it's a fact that most traders truly over leverage and lose. With leverage someone need to be very accurate with the execution of his trading signals and very careful with his stop loss protection. When trading on leverage if someone is not careful, a quick equity spike will wipe his position.

Forex is a very big market but for most retail traders dealing with brokers the odds are shifted against them. Online futures trading supply a much more level playing field for most traders who want to take part in forex trading. In stock trading someone can buy and hold and his only risk what he has paid for the stock and so long as it comes back he make a profit and he can wait. Since most traders lack discipline, they very often hope a position turns around and don't have a get out point. A small loss soon ends up being a large loss and their equity is gone. Most traders hate admitting their mistake - they want the large profit potential leverage gives them but don't think about the downside.

Volatility: Forex prices are volatile and make large moves everyday - combine this with leverage and someone has a powerful tool for profits which of course can also cause losses. Most traders don’t have idea about how volatility adversely affects their trading and how to deal with it. Most forex traders have never heard of, let alone understand "standard deviation of price" yet it's an inseparable part of any traders’ forex education.

Another demerit with this trade, especially in retail trading is that the retail broker has easy access to data regarding all customer orders. This data can be used to control the prices and retail broker pockets the difference as their own profit. Many times, this can result in losses to a group of investors, without knowing that they have been taken for a ride.