Advantages and Benefits of Forex Trading
Forex benefits are what make the trading on the Forex so different from the trading on other financial markets and additionally so attractive in the eyes of trader. Remembering that Forex is the place of risk, still it stays the place of possibilities and has more advantages when compared to the other markets’ trading. This tutorial is directed on comparing, finding out and showing the Forex advantages and benefits that the Forex trading can give to a particular trader. If the trader has ever thought of Forex vs. Futures comparing, or if not, this tutorial will be helpful.
Trading Round the Clock
The first and the most important Forex advantage is the ability to round-the-clock, 24/7 trading. From morning till next morning, the markets in the different time zones are open and welcome the traders, giving the ability to buy and sell foreign currencies. If some breaking news are coming, traders are always up to respond, no matter when it happens, even if it’s late at night. P&L is never affected by the reports or analyst conference calls that were held after hours.
For the U.S. equities, after hours trading is connected to some limitations, though, the ECN (for Electronic Communication Networks) exists to get the buyers and sellers all together when it’s possible. But still there is no guarantee that every trade will be held, and no guarantee for a fair market price. So it’s quite logical that frequently traders have to wait until the market opens again in the next day for receiving a tighter spread. OTC (for Over The Counter) cash market is never traded on the organized exchange markets like the NY Stock Exchange or other stock exchanges that’s been institutionalized. So, the OTC market and its liquidity has to move around the world continuously, and never “closed” during the week long to allow the day sessions with all their variety and overnight sessions for all the type of traders. OTC market is as well based on the global market pricing politics for currencies that’s made by banks and foreign exchange dealers. The global foreign currency dealers’ and banks’ majority are compensated with the difference between the bid/ask spread in the currency price, that’s been offered to the traders who are participating, and (or) the ability to accumulate the positions on the proprietary basis, continuously assuming the risk of the net open positions that’s they been carrying. Through it all, it should be kept in mind that trading Forex involves really significant loss risk and private traders should only use true discretional capital when trading. The leverage that’s been offered in Forex trading is typically so much greater than the one that’s been offered in the Futures market, but it can work against the trader if something happens and trader is wrong. So traders should always be aware of all the risks associated with Forex currency trading before entering the trade and should take some time for self-education on managing risks that can happen while trading. Forex vs. Futures is the battle won by Forex, but it’s recommended to remember that all the advantages can play against the trader in some moment if trader’s not careful.
Liquidity
Next one of the Forex benefits is really superior liquidity. With a daily trading volume known to be 50x larger than one of the New York Stock Exchange, there are always some brokers or dealers who is willing to sell or buy currencies in the FX markets. The superior liquidity of foreign exchange market – especially one of the major currencies – helps reach the price stability. Traders are almost always opening or closing a position at the fair market price. Forex vs. Futures: due to the trade volume that is lower, the ones who invest in Futures are more affected by liquidity risk, and that results with a more wide dealing spread or some larger price movements responding to any large transaction.
Leverage
Leverage is next one of the Forex advantages. 100:1 leverage is commonly known and available from online Foreign exchange market dealers, and this substantially exceeds the 2:1 margin offered from the equity brokers. Traders post $1000 margin (or 1%) for a $100.000 position at 100:1. The substantial leverage that’s been available from firms that go into online currency trading is a really powerful tool that can bring a lot of money. Leverage is essential in the Forex trading. It happens because the average daily percent of moving of a major currency is less than 1%, when the stock can easily perform 10% price moving on any particular day. The risks of the margined trading should be managed, and the most effective way is to follow a disciplined trading style that holds stop and limit orders. This is a possibility of another great Forex trading benefit – Automated trading.
Many professional currency traders use automated Forex trading systems to make sure that they don’t miss trading opportunities. The main advantage from automated Forex trading lies in the opportunity to transmit account, trade and money management to a computer program which monitors the market on behalf of the trader. In other words, the computer program releases the trader from the routine market watching and the execution of trade operations. The Stop Loss orders, which were talked about higher, is the great advantage of using automated Forex trading systems too.
Forex vs. Other Financial Markets
Comparing Forex to other markets, it is really much more cost-efficient to choose Forex for trading. Most Forex brokers offer their traders access to all of the relevant market information including trading tools on the free basis. If the trader’s using the stock market, the commissions can range from $7.95-$29.95 per one trade using online discount brokers and to $100 or more using the full service brokers. Another important point about commissions is the width of the spread on bid/ask prices. Not mentioning the deal size, Forex spreads are usually counted in 5 pips or less (pip is about the .0005 US cents). Generally, width of the Forex transaction spread is normally less than 1/10 of a stock transaction that could include a 1/8 wide spread.
The last but not the least Forex advantage is about the profit potential in both rising and falling markets. In every open Forex position, the investor is long in one currency and, naturally, short in the other. A short position is that one where trader sells a currency anticipating its depreciation. This means that falling market can bring the trader the potential of profit either.
These advantages are surely very convincing in choosing the Forex market for trading.
