Pros and Potential Cons of Trading Forex
If you intend to trade currencies, in addition to the previous comments regarding broker risk, the pros and potential cons of trading forex are laid out as follows:
Pro: The forex markets are the largest in terms of volume traded in the world and therefore offer the most liquidity, thus making it easy to enter and exit a position in any of the major currencies within a fraction of a second.
Potential Con: As a result of the liquidity and ease that a trader can enter or exit a trade, banks and/or brokers offer leverage, which means that a trader can control quite large positions with relatively little money of their own. Leverage in the range of 100:1 is a high ratio, but not uncommon. Of course, a trader must understand the use of leverage and the risks that leverage can impose on an account. Leverage has to be used judiciously and cautiously if it is to provide any benefits. A lack of understanding or wisdom in this regard can easily wipe out a trader's account. (For more on leverage, check out "Forex Leverage: A Double-Edged Sword.")
However, if the Australian dollar is strengthening against the yen, it is appropriate to buy the AUD/JPY and to hold it in order to gain in both the currency appreciation and the interest yield.
