Advantages of FX Over the Stock Market
If you are interested in trading currencies online, you will find that the foreign exchange (FX) market offers several advantages over stocks. Here are some:
Forex is a true 24-hour market. Whether it's 6 PM or 6 AM, somewhere in the world there are buyers and sellers actively trading foreign currencies. Traders involved in FX can always respond to breaking news immediately, and profit and loss is not affected by after hours earning reports, analyst conference calls, nor trading stoppages due to "pending news" or announcements.
After hours trading for U.S. Stocks and Futures brings with it several limitations. ECN's (Electronic Communication Networks), also called matching systems, exist to bring together buyers and sellers – when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, traders must wait until the market opens the following day in order to receive a tighter spread. Consequently, the longer and continuous trading days scores one point for the FX over equities.
With a daily trading volume that is 50 times larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies. The liquidity of the FX Market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price. This is a huge advantage over stocks.
Because of the lower trade volume, investors in the stock market and other exchange-traded markets are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.
500:1 Leverage in FX
100 to 1 leverage is commonly available from online FX dealers (We offer 500:1), which substantially exceeds the common 2:1 Margin offered by equity brokers, and 15:1 in the futures market. At 100:1, traders post $1000 Margin for a $100,000 position, or 1%. At 500:1, traders only need to post $200 for every $100,000 currency position.
While certainly not for everyone, the substantial leverage can multiply both gains and losses. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in foreign exchange. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day.
The most effective way to manage the risk associated with margined forex trading is to diligently follow a disciplined trading style that consistently utilizes stop and limit orders. Devise and adhere to a trading system where your controls kick in when emotion might otherwise take over.
Lower Transaction Costs
It is much more cost-efficient to trade forex in terms of both commissions and transaction fees.
Commissions for stock trades in the online discount brokerage world typically range from $7.95-$29.95 per trade, with full service brokers typically charging $100 or more per trade. An average commission on a Futures trade is $15 a round turn. Forex brokers offer much lower commission structures. Thus, investors involved in trading foreign currencies could limit their overall cost.
Equal Profit Potential in Both Rising and Falling Markets
In every open FX position, an investor is long in one currency and short in the other. A short position is one in which the trader sells the base currency in anticipation that it will depreciate. This means that in currency trading, potential exists in a rising as well as a falling market environment.
The ability to sell currencies without any limitations is another distinct advantage over stock trading. In the US equity markets, it is much more difficult to establish a short position due to the price controls that kick in when a the market falls by a given amount. This limitation does not exist in the trading of currencies, another plus in FX.
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