Benefits of Trading the Forex Market

Benefits of Trading the Forex Market

Historically, the foreign exchange market was available most to major banks, multinational corporations and other participants who traded in large transaction sizes and volumes. Small traders including individuals like you and I had little access to this market for so long. Now with the advent of the Internet and technology, FX trading is becoming an increasingly popular alternative investment to the general public.

The benefits of trading the foreign exchange market:

It is open 24 hours and only closes on weekends;

It is very liquid and efficient;

It is very volatile;

It is a very low transaction costs;

You can use a high level of leverage (borrowed money) with ease, and

You can profit from a bull or bear market.

Continuous, 24-hour trading

The exchange is a 24-hour market. You can decide to trade after returning home from work. Regardless of what time frame you want to trade in what time of day, there will be enough buyers and sellers to take the other side of your trade. This feature of the market gives you enough flexibility to manage your trading around your daily routine.

Liquidity and efficiency of services

When there are many buyers and many sellers, you can expect to buy or sell at a price that is very close to the final market price. The currency market is most liquid market in the world. Volume of foreign exchange markets can be between 50 and 100 times larger than the New York Stock Exchange (Source:. Oanda)

When you are trading stocks, you may have experienced events where one piece of news accelerates or slows down the price of the underlying stock you can buy into. Perhaps the director is cast by shareholders of the company or firm has just announced a new product and big investors to purchase shares of a company. Stock prices can be dramatically affected by the actions or inactions of one or several individuals. So if you are relying on television reports and newspapers to get your news, most of the opportunities or warnings will come too late to take advantage of when you get them.

The value of the currencies of the other side is influenced by many factors and so many participants that the likelihood of an individual or group of individuals drastically affecting the value of a currency is minute. Because of its sheer size, the currency market is hard to manipulate. The ability of people to engage in 'insider trading' is virtually eliminated. As an average trader, you are less threatened. You should probably be played on relatively equal ground along with all other traders and investors who will compete.

Note on price gaps:

For those people who are already traded on other markets, you probably know about the "holes" price. "Gaps" occur when prices of "jump" from one price level to another without having taken any incremental steps to get there. For example, you can be part of trading that closes at $ 10 at the end of today, but for an event that happens overnight, it opens tomorrow at $ 5 and continues to go down for the rest of the day.

Gaps bring another degree of uncertainty that may interfere with the strategy of the trader. Probably one of the most worrying aspects of this is when a trader uses stop-losses. In this case, if a merchant puts an end loss of $ 7 because he no longer wants to be in the market if the share price hits $ 7, his trade will remain open overnight and the trader wakes up tomorrow with a loss greater than he can be prepared for.

After watching a couple of forex charts, you will realize that there are 'gaps' little or no cost, especially in the longer term charts such as 3-hour, 4 hour or daily charts.

Volatility

There are opportunities for trading, when the price turns. If you buy shares for $ 2 and stays there, no chance to make a profit. The size of the level of this fluctuation and its frequency is referred to as volatility. As a trader, this volatility is to profit from. Large volume transactions and high liquidity combined with fewer trading instruments generate greater intra-day volatility in the currency market that can be used by day traders. The high volatility in the currency market shows that the trader can potentially earn 5 times more money from currency trading than trading the most liquid stocks.

Volatility is a measure of maximum return that a trader can generate with perfect foresight. Volatility of most liquid stocks are between 60 and 100. Volatility for currency trading is the 500th (Source: Oanda.)

In this respect, currencies make a better trading vehicle for day-traders from the capital markets.

Low transaction costs

A currency transaction typically occur no commission or transaction fees. For a forex trader, the spread is the only cost he or she should be taking cover in the position. In addition, because the efficiency of the currency market, there is little or costs are not 'slippage ".

"Slippage 'is the cost involved when traders enter the market at a price worse than the level they wanted to get into. For example, a trader wants to buy a share of $ 2.00, but this time in order gets executed, his gets buying shares in $ 2.50. That fifty cents difference is his slippage cost. Slippage cost affects large volume traders a lot. When they buy large quantities of goods that oversupplies the market with buying orders. This applies pressure on prices to go up. By the time they can buy all the quantities they wanted, the average price they got their products will be higher than the price they intended to get. Conversely, when they sell large quantities of goods, they oversupply the market with sell orders. This applies pressure on the price to go down. By the time they finish selling all their products, their average selling price is less than what was originally intended to sell for.

Due to lower transaction costs, minimum slippage and strong intra-day volatility, individuals can trade frequently at small costs. As an approximation, you can only be expected to have a spread of 0.03% from its position size. To give one example, can be bought and sold $ 10,000 and it will only make a 3-point spread, equivalent to $ 3.

Leverage

There are a number of banks or people who would lend you money so you can use to trade stocks. And if so, it would be very difficult for you to convince them to invest in you and in your idea that a part will go up or down. Therefore, most of the time if you have $ 10,000 account, you just really can not afford to buy $ 10,000 worth of shares.

In currency trading however, because they use the borrowed money, you can trade $ 10,000 of a currency and you only need somewhere between fifty (as opposed to lending ratio of 200:1) to two hundred dollars (as opposed to lending ratio of 50: 1 ) in trading account. This makes it impossible for the average trader with a small trading account, under $ 10,000 to be able to profit from movements of sufficient currency exchange rates. This concept is explained further in part-time currency trader.

Profit from Bull and Bear Market

When you trade stocks, you can only profit when the stock price goes up. When you think it is about to go down or that it is only going to be moving sideways, then the only thing you can do is to sell your stocks and stay away. One of the frustrations of trading shares is that an individual can not profit when prices are going down. In the currency market, it is easy for you to trade currency down so that you can profit when you think will lose value. This is easily done, because currency trading simply involves buying one currency and selling another, there is no structural bias that makes it hard to 'down' trade. This is why the currency market is occasionally called the eternal bull market.




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