To properly understand the disadvantages of foreign exchange (also known as "Forex") investing, consider how this market works and how it compares to other types of investment activities. Before getting involved in foreign currencies, even if you have a strong background in economics and statistics, understanding the impact of all the factors impacting foreign currencies is extremely difficult. Large companies and investment banks have departments dedicated to foreign exchange given the complexity of this asset. Unlike your local stock market, Forex trading happens constantly. The prospect of easy profits has also given rise to numerous Forex investing scams - an additional risk investors have to educate themselves about in this area.
The sheer size of the Forex market is another challenge small investors will meet in this market. According to Barry W. Ickes at Pennsylvania State University, the foreign exchange market is much larger than the world's GNP and even world trade. On a daily basis, the trading volumes in foreign exchange exceeds $1 trillion US dollars in value. It is estimated that a majority of currency trading involves a handful of currencies: the US dollar, the Japanese Yen and the Euro. Seeking a gain in these large markets will be challenging as you will not have the same capital and resources available as large banks and firms. While large players are at work in every aspect of the investing world, their role is even stronger here.
Unlike stock prices and other types of financial assets, the foreign exchange market is also heavily impacted by politics. The political aspect of foreign exchange investing makes this market more difficult to predict. From time to time, central banks around the world intervene in the markets to change the value of their currencies - even if these interventions change the value of a currency only slightly, this can quickly overcome your trading strategy. For investors that are using US dollars (e.g. US dollars / Yen, US Dollars / British Pounds, etc.), there are additional problems. As the world's reserve currency, many investors, banks and others move their investments to US dollars in times of uncertainty and crisis. This special status of the US dollar can make it difficult to make sustained gains in Forex trading.