Forex Advantages vs.
Investors and speculators using the Internet as an investment tool will find that the Forex market offers opportunities unknown elsewhere. The 200:1 entry leverage value is an example. Brokerages will have margin calls set at different levels, exact leverage may vary. The traders cost of doing business is called the Spread, which is the difference between the bid and the ask price on your chosen currency pair. The aforementioned items are a few of the controls that will effect your outcome.
24-Hour Trading
Forex is a true 24 hour market, 5.5 days
a week, which offers major advantages of
accessibility. Investors are
able to trade at any hour, thus
allowing more flexibility for personal,
business and social activities. Whether
trading at 6am, 4p.m., or even 1am,
there will always be buyers and sellers
actively trading foreign currencies.
Such flexibility allows traders to
immediately respond to breaking news and
other political factors driving the
market. Comparing the equities
market, it has several limitations. In the
US, for example, equities traders have
access to E.C.N.s (Electronic
Communications Networks), also known as
“matching systems”. These networks are
established to provide a method for
equities traders to buy and sell amongst
each other. Such networks are usually
not able to offer as tight of spreads as
would be offered during normal market
hours, thus most trades are not executed
at a fair market price, subsequently
there is no guarantee that every trade
will be executed.
Unmatched Liquidity
An
investment market with lacking
liquidity, or a lack of buyers and
sellers at certain times, is often the
demise of traders who need in or out of
the market without delay. The global
network of governments, banks,
corporations, hedge funds, and
individual traders that collectively
drive the Forex market, are in essence,
also driving the world’s largest network
of liquidity. Such high trade volume
works to ensure trade execution and the
stability of prices, regardless of the
time of day. Compare this to equities traders,
they are
more susceptive to liquidity risk and
are subject to potentially wider dealing
spreads and larger price movements.
Liquidity in the equities market really
does pale in comparison to that of the
Forex market.
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High Leverage
Leverage is the key to understanding the
risk associated with trading the Forex
Market, and of course, the potential for
gain. Many Forex brokers offer leverage
as high as 200 – 1, meaning that $50 of
margin would control a $10,000 position
in the market (this is an example of a
mini lot). Forex trading is often
attractive to investors coming from the
equities market because Forex trading
offers such high leverage. It is
important to understand why Forex
brokers offer higher leverage, and of
course… the dangers associated with
such.
To some extent, higher leverage is a
necessary evil in the Forex market. It
can offer advantages over equities
trading, but only if it is properly
understood and utilized. Though currency
values on a global stage are constantly
in a state of flux, high liquidity and
market stability translate to relatively
small daily price movements. In fact,
average daily movement is around 1% on
most major pairs. Compare that to the
equities market, where average daily
movements are closer to 10% and it is
not hard to understand why large
contracts are needed in order to yield
profits on intra-day price movements.
Without high leverage most retail
investors would not be able to afford
trading in the Forex market. However,
with increased buying power comes
increased risk. Traders who are new to
the market often make the mistake of
over-trading their account. Because
relatively small margin is required to
open large positions beginning traders
often make the mistake of opening too
many positions at one time. A quick
market move can then result in
substantial losses. It is advised that
any trader new to the Forex market to
trade only a small percentage of
their account at any one time.
Profit Potential in Both Rising and
Falling Markets
Like any market, there is always a buyer
and a seller the world of currencies.
The potential for profit will of course
rally between the buyers and sellers,
the longs and the shorts. Trading
currencies in pairs offers the advantage
of speculation from either side, but it
is the volatility in combination with
excellent liquidity that offers currency
investors a true advantage over any
other market. Regardless of the time of
day, traders in the Forex market can
long or short any currency pair of their
choice.
Many brokers also offer hedging, meaning
that traders can take a long and short
position on the same currency pair. The
market’s volatility provides the
constant potential for gain, and of
course, the constant potential for loss
as well. Forex trading can be risky, but
execution in or out of trades should not
be a problem when trading through a
reputable broker. Equities traders, on
the other hand, may have a much more
difficult time liquidating stocks when
the market is moving against them.
Higher Risk
The off-exchange retail foreign currency
market (or Forex market) has many
differences, as outlined above. However,
one of the most significant factors is
the element of risk. The Forex market is
the riskiest of all investment vehicles
and is suitable only for experienced
traders. The higher leverage and
volatility found in this market increase
the traders risk of loss. There is the
potential to lose, all or more, of your
original investment.