Trading the Forex market has become very popular in the last years. Why
is it that traders around the world see the Forex market as an
investment opportunity? We will try to answer this question in this
article. Also we will discuss come differences between the Forex
market, the stocks market and the futures market.
Some of the benefits of trading the Forex market are:
Superior liquidity
Liquidity is what really makes the Forex market different from other
markets. The Forex market is by far the most liquid financial market in
the world with nearly 2 trillion dollars traded everyday. This ensures
price stability and better trade execution. Allowing traders to open
and close transactions with ease. Also such a tremendous volume makes
it hard to manipulate the market in an extended manner.
24hr Market
This one is also one of the greatest advantages of trading Forex. It is
an around the click market, the market opens on Sunday at 3:00 pm EST
when New Zealand begins operations, and closes on Friday at 5:00 pm EST
when San Francisco terminates operations. There are transactions in
practically every time zone, allowing active traders to choose at what
time to trade.
Leverage trading
Trading the Forex Market offers a greater buying power than many other
markets. Some Forex brokers offer leverage up to 400:1, allowing
traders to have only 0.25% in margin of the total investment. For
instance, a trader using 100:1 means that to have a US$100,000
position, only US$1,000 are needed on margin to be able to open that
position.
Low Transaction costs
Almost all brokers offer commission free trading. The only cost traders
incur in any transaction is the spread (difference between the buy and
sell price of each currency pair). This spread could be as low as 1 pip
(the minimum increment in any currency pair) in some pairs.
Low minimum investment
The Forex market requires less capital to start trading than any other
markets. The initial investment could go as low as $300 USD, depending
on leverage offered by the broker. This is a great advantage since
Forex traders are able to keep their risk investment to the lowest
level.
Specialized trading
The liquidity of the market allows us to focus on just a few
instruments (or currency pairs) as our main investments (85% of all
trading transactions are made on the seven major currencies). Allowing
us to monitor, and at the end get to know each instrument better.
Trading from anywhere
If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.
Some of the most important differences between the Forex market and other markets are explained below.
Forex market vs. Equity markets
Liquidity
FX market: Near two trillion dollars of daily volume.
Equity market: Around 200 billion on a daily basis.
Trading hours
FX market: 24hr market, 5.5 days a week
Equity market: Monday through Friday from 8:30 EST to 5:00 EST
Profit potential
FX market: In both, rising and falling markets.
Equity market: Most traders/investor profit only from rising markets.
Transaction costs
FX market: Commission free and tight spreads.
Equity market: High Commissions and transaction fees.
Buying power
FX market: Leverage up to 400:1
Equity market: Leverage from 2:1 to 4:1
Specialization
FX market: most volume (85%) is made on major currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD)
Equity market: More than 40,000 stocks to choose from
Forex market vs. Futures market
Liquidity
FX Market: Near two trillion dollars of daily volume.
Futures market: Around 400 billion dollars on a daily basis.
Transaction costs
FX market: Commission free and tight spreads.
Futures market: High commissions fees.
Margin
FX market: Fixed rate of margin on every position.
Futures market: Different levels of margin on overnight positions than day time positions.
Trade execution
FX market: Instantaneous execution.
Futures market: Inconsistent execution.
All this makes the Forex market very attractive to investors and
traders. But I need to make something clear, although the benefits of
trading the Forex market are notorious; it is still difficult to make a
successful career trading the Forex market. It requires a lot of
education, discipline, commitment and patience, as any other market.
