Forex markets are significantly different than regular stock or bond markets. The differences are often misunderstood, so here we’ll take a look at what makes Forex trading different that traditional investing or trading. The 6 forex advantages are:
1. Lower Margin – Higher Leverage
Just like with commodities futures and some stock trading, a forex trader has the ability to control a large amount of the currency by putting up a small amount of margin. However, the margin needed for trading futures are usually about 5% of the full value of the holdings. Not even close to the amount of leverage available in Forex.
In forex every dollar can control up to $1000 dollars of underlying currency. What this means is that when trading forex, a trader’s money can control 5 times as much value of product as a futures trader’s or 50 times more than a stock trader’s.
When you are trading on margin, successful trades can be VERY profitable, but there’s no free lunch so it’s important that you take the time to understand the risks are elevated as well.
2. No Exchange Fees or Commissions
When you trade in futures or stocks, you have to pay exchange and brokerage fees. These can be signifcant factors to active traders. Trading forex is commission free. Currency trading is a worldwide inter-bank market that allows buyers to be electronically matched with sellers in an instant.
3. Forex Trading has Limited Risk
When trading futures or shorting stocks, your risk can theoretically be unlimited. For example, if you thought that the prices for orange juice futures were going to continue their upward trend and locked in a position just before the a Florida hurricane.
The price could fall so sharply, you would not have been able to leave your position and could have wiped out the equity in your entire account as a result of your leverage.
Forex trading allows for a greater degree of risk management than is available in other capital markets. Using margin, being able to sell or buy without limit, high levels of liquidity (2.3 trillion dollars/Euros/Yen etc. traded daily), and a 24h/6d market, give the forex market trader great flexibility regarding risk management. In other words it is not possible to have anywhere near as sophisticated of a risk management system in other markets.
4. The Ability to Rollover a Position
When futures contracts expire, you have to plan ahead if you are wanting to rollover your trades. Forex positions expire every 2 days and you must rollover each trade to stay in your position.
5. Forex is a 24-Hour Marketplace
With futures, you are generally limited to trading only during the few hours that each market is open in any one day. Forex, on the other hand, is a 24 hours a day 6 days a week market. The day begins in Australia, and flows through the opens and closes of the major financial centers in Asia, Europe, the United States.
6. Massive Liquidity
Foreign exchange is the largest market in the world with an average daily volume of US$2.3 trillion. That is about 50 times as large as all the commodities futures markets put together!
With the huge number of people, businesses and countries trading forex around the globe, it is very hard for even governments to control or manipulate the price of their own currency. Which is very good for individual investors.
