Why Forex?
Why trade Forex? If you are interested in trading currencies online, you will find that the Forex market offers several advantages over equities trading. Take the time to learn about the benefits in trading forex.
Trade On Your Schedule
At $3 Trillion Per Day, Forex is the Most Traded Market in the World
Up to 200:1 Leverage
Lower Transaction Costs
Trading Opportunities in rising and falling markets
Trade On Your Schedule
The forex market is open 24 hrs a day, 5 1/2 days a week as it’s open from 5:00PM ET on Sunday to 5:00PM on Friday, offering a major advantage over equities trading. Whether it's 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately, and P&L is not affected by after hours earning reports or analyst conference calls.
After hours trading for U.S. equities 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.
At $3 Trillion per day, Forex is the most traded market in the world.
The sheer volume of Forex helps to facilitates price stability in most market conditions. What's more, almost 85% of all currency transactions involve the 7 major currency pairs.
Up to 200:1 Leverage
With more buying power, you can increase your total return on investment with less cash outlay. Of course, increasing leverage increases risk. With $1,000 cash in a margin account that allows 200:1 leverage (.5%), you can trade up to $200,000 in notional value.
100:1 leverage is commonly available from online FX dealers, which substantially exceeds the common 2:1 margin offered by equity brokers. At 100:1, traders post $1,000 margin for a $100,000 position, or 1%. Under some conditions, leverage can be increased to 200:1.
While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful, moneymaking tool. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market. 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 trading is to diligently follow a disciplined trading style that consistently utilizes stop and limit orders. Devise and adhere to a 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 range from $7.95-$29.95 per trade with online discount brokers and up to $100 or more per trade with full service brokers.
Forexte.com is compensated through the bid/ask spread.
Another important point to consider is the width of the bid/ask spread. Regardless of deal size, forex dealing spreads are normally 5 pips or less (a pip is .0005 US cents). In general, the width of the spread in a forex transaction is less than 1/10 that of a stock transaction, which could include a .125 (1/8) wide spread.
Trading opportunities in rising and falling markets
In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling market.
The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero Up tick rule, which prevents investors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sale.
