Want to know some reasons why traders love the forex market? Read on to find out what makes it so attractive!
Advantages Of Forex Trading
There are many benefits and advantages of trading forex.
Here are just a few reasons why so many people are choosing this market:
No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail forex brokers are compensated for their services through something called the “spread“.
No fixed lot size
In the futures markets, lot or contract sizes are determined by the exchanges. A standard size contract for silver futures is 5,000 ounces. In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (although we’ll explain later why a $25 account is a bad idea).
Low transaction costs
The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. For larger transactions, the spread could be as low as 0.07%. Of course, this depends on your leverage and all that will be explained later.
A 24-hour market
There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the forex market never sleeps. This is awesome for those who want to trade on a part-time basis because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.
No one can corner the market
The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.
In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.
For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on.
While this is all gravy, let’s remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
Because the forex market is so enormous, it is also extremely liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will as there will usually be someone in the market willing to take the other side of your trade.
You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).
Low Barriers to Entry
You would think that getting started as a currency trader would cost a ton of money. The fact is, when compared to trading stocks, options or futures, it doesn’t. Online forex brokers offer “mini” and “micro” trading accounts, some with a minimum account deposit of $25.
We’re not saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn’t have a lot of start-up trading capital.
Free Stuff Everywhere!
Most online forex brokers offer “demo” accounts to practice trading and build your skills, along with real-time forex news and charting services.
And guess what?! They’re all free!
Demo accounts are very valuable resources for those who are “financially hampered” and would like to hone their trading skills with “play money” before opening a live trading account and risking real money.
Now that you know the advantages of the forex market, see how it compares with the stock market!
Forex vs. Stocks
There are approximately 2,800 stocks listed on the New York Stock exchange. Another 3,100 are listed on the NASDAQ.
Which one will you trade? Got the time to stay on top of so many companies? In spot currency trading, there are dozens of currencies traded, but the majority of market players trade the four major pairs.
Aren’t four pairs much easier to keep an eye on than thousands of stocks?
Look at Mr. Forex. He’s so confident and sexy. Mr. Stocks has no chance!
That’s just one of the many advantages of the forex market over the stock markets. Here are a few more:
The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 4:00 pm EST until Friday at 4:00 pm EST, with customer service usually available 24/7.
With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.
Minimal or No Commissions
Most forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone. Combined with the tight, consistent, and fully transparent spread, forex trading costs are lower than those of any other market.
Most brokers are compensated for their services through the bid/ask spread.
Instant Execution of Market Orders
Your trades are instantly executed under normal market conditions. Under these conditions, usually the price shown when you execute your market order is the price you get.
You’re able to execute directly off real-time streaming prices (Oh yeeeaah! Big time!).Keep in mind that many brokers only guarantee stop, limit, and entry orders under normal market conditions. Trading during a massive alien invasion from outer space would not fall under “normal market” conditions.
Fills are instantaneous most of the time, but under extraordinarily volatile market conditions, like during Martian attacks, order execution may experience delays.
Short-Selling without an Uptick
Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or whichever way the market is moving.
Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. So you always have equal access to trade in a rising or falling market.
Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen.
Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees.
Spot currency trading, on the other hand, is decentralized, which means quotes can vary from different currency dealers.
Competition between them is so fierce that you are almost always assured that you get the best deals. Forex traders get quicker access and cheaper costs.
Buy/Sell programs do not control the market.
How many times have you heard that “Fund A” was selling “X” or buying “Z”? The stock market is very susceptible to large fund buying and selling.
In spot trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small.
Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.
Analysts and brokerage firms are less likely to influence the market
Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as “buy,” when the stock was rapidly declining?
It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it.
IPOs are big business for both the companies going public and the brokerage houses.
Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear.
Foreign exchange, as the prime market, generates billions in revenue for the world’s banks and is a necessity of the global markets. Analysts in foreign exchange have very little effect on exchange rates; they just analyze the forex market.
|Minimal or no Commission||YES||No|
|Instant Execution of Market Orders||YES||No|
|Short-selling without an Uptick||YES||No|
|No Market Manipulation||YES||No|
In the battle between forex vs. stocks, it looks like the scorecard between Mr. Forex and Mr. Stocks shows a strong victory by Mr. Forex! Will it go for 2-0 with Mr. Futures?
Forex vs. Futures
It’s not just the stock market. The forex market also boasts of a bunch of advantages over the futures market, similar to its advantages over stocks.
But wait, there’s more… So much more!
In the forex market, $5.3 trillion is traded daily, making it the largest and most liquid market in the world.
This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market.
The futures market trades a puny $30 billion per day. Thirty billion? Peanuts!
The futures markets can’t compete with its relatively limited liquidity.
The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage, with exception to extremely volatile market conditions.
At 5:00 pm EST Sunday, trading begins as markets open in Sydney.
At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST.
And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST. Before New York trading closes, the Sydney market is back open – it’s a 24-hour seamless market!
As a trader, this allows you to react to favorable or unfavorable news by trading immediately.
Overnight markets in futures contracts do exist, and while liquidity is improving, they are still thinly traded relative to the spot forex market.
Minimal or no commissions
With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions. But really, the commission fees are peanuts compared to what you pay in the futures market.
The competition among spot forex brokers is so fierce that you will most likely get the best quotes and very low transaction costs.
When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution. Even with the advent of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain.
The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.
Guaranteed Limited Risk
Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account.
Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account.
During normal market conditions, all open positions will be closed immediately (during fast market conditions, your position could be closed beyond your stop loss level).
In the futures market, your position may be liquidated at a loss bigger than what you had in your account, and you will be liable for any resulting deficit in the account. That sucks.
|Minimal or no Commission||YES||No|
|Up to 500:1 Leverage||YES||No|
|Guaranteed Limited Risk||YES||No|
Judging by the Forex vs. Futures Scorecard, Mr. Forex looks UNBEATABLE! Now meet the winners who trade the forex market.