In comparison to trading stocks, trading foreign currencies (Forex trading) has some key advantages. Eight reasons why you should try FX trading are listed below.
1. Forex Trading – 24 Hours per Day
Stocks are trades in stock exchanges. These stock exchanges are only open during normal working hours, usually from 9 am to 5 pm.
Forex trading is different: During almost six days a week you can trade currency pairs around the clock. So it is completely up to you when you want to “work” as a FX trader. In theory you can do this around the clock. You can do this in the morning (before going to work in your corporate job) or in the evening after your normal job. Or – if you make your money as a FX trader – you can work whenever you want.
The trading volume is, however, not equally distributed over the course of a day. It is obvious that currency pairs that for example include the Yen are primarily traded at times at which Japanese traders are active – ie, in the early hours of the morning European time or during night in US time.
In theory, you don’t need sit at your PC. The Forex broker AvaTrade for example supports Metatrader, a trading software that trades automatically.
2. Forex Trading – Anywhere
In order to trade FX, all you need is a device with internet access. Therefore, you can virtually trade from everywhere foreign currencies: at home in your office, at home in the living room, at home on the balcony, in your corporate office, or even from the beach during your stay in the Bahamas. And with a web trading software, you can trade from your mobile device with Windows Mobile or from your iPhone from every spot in the world where you have a mobile data connection. The established Forex broker Forexyard has developed an iPhone app, try it out now!
3. Liquidity in the FX Market
The market for foreign currencies is the most liquid market in the world. This means that in a fraction of second, buyers and sellers are matched with each other. If you want to trade stocks of a small listed company, the daily volume (the number of shares traded each day) is small. In the Forex market, liquidity is extremely large, as the daily trading volume is over 4 trillion U.S. dollars.
Due to the size of the market, there are in addition to the liquidity two other big advantages: low risk of price manipulation and minimal costs of trading. Due to the liquidity and size of the market, price manipulations by some market participants are almost impossible. You would need huge sums to manipulate foreign exchange rates. And because the market is so large spreads between buying and selling rates are extremely small. The more liquid a market is, the lower costs for trading are. And the lower the costs for trading are, the less the price must move in order to achieve a profit.
4. No Commissions in Forex Trading
In contrast to trading stocks, you do not have to pay commissions when buying or selling currencies with a Forex broker. The only “costs” that arise is the spread. The small difference between the buy and sell price (the bid-ask spread) is what your FX broker earns from you with every trade you make. The spreads for the most traded currency pairs are very low and are usually less than 5 pips – see our comparison table of FX broker spreads for more information. InstaForex only charges a spread of 3 pips on all major currency pairs.
Click here to open an InstaForex account in order to trade with low spread
5. Leverage in Forex
With the use of leverage you can achieve great gains (or losses!) with very small investments. Common leverages range in Forex trading range from 1:50 to 1:1000. Most FX brokers offer a leverage of 1:200 on the most traded currency pair EUR/USD. A leverage of 1:200 means that you can move $200 by investing only $1. Or trade with $100,000 by investing only $500. If your currency pair increases by half a percent, then you double your investment to $1,000. Using leverage allows you to move huge amounts of money by investing only a small fraction of money. The greater the leverage, the lower the price movements must be in order to make a profit. And the greater the leverage, the lower the margin requirements are. With a leverage of 1:200, the margin is 0.5%. In the example above, this is just $500. However, once your position has dropped by $500 to $99,500, your position will usually automatically be sold because it is no longer covered by your margin.
With a maximum leverage of 1:1000 InstaForex offers the greatest opportunities: have a look at InstaForex now.
6. Earning money with Forex money in falling markets
If you buy stocks you speculate that they will increase in value. This is going to make you money. The performance of individual stocks is heavily dependent on the performance of the overall market. The correlation is usually greater than zero (positive correlation) and in similar and strongly connected markets (like the markets in the European Union) even close to one. In an economic downturn it is therefore pretty difficult to earn money when buying stocks.
The Forex market is in this respect completely different. You are trading a currency pair, for example Euro against the Yen. You have to consider only how the two currencies will develop against each other: Which currency will appreciate against the other currency? And which currency will depreciate? If you think that the Euro will decline against the Yen, then sell Euro (go short in Euro) and buy Yen to (go long in Yen). When your forecast was correct, you’ve earned money: the Yen you bought are now worth more than before.
If there were not spreads, FX Trading would be a complete zero-sum game: What the buyer of a currency pair wins (loses), his counterparty loses (wins) automatically. When buying shares, this is usually different: an investor establishes a strategic equity ratio and then selects stocks to reach this quota. In rising markets, he will achieve gains – the question is only whether he achieves the maximum profits with the given risks he took.
7. Forex Trading: Simple yet Complex
The Forex market seems to be very simple at first glance. Most of the trading volume is traded in a few currencies and currency pairs. The most important currency pair is USD/EUR. But the exchange rates themselves are determined through a variety of factors that ultimately influence the supply and demand for a particular currency. If the demand for a currency increases, its prices will increase until supply and demand are back in balance. This process occurs in the ultra-liquid Forex market almost every second. Without high-speed Internet access and automated trading programs, it is difficult for a casual trader to compete with professional traders: the FX market is simply more complex than it appears at first sight and it requires a lot of knowledge, time, skill and responsiveness to earn a living as a Forex trader.
8. Forex Professional Software for Private Traders
Professional tools for FX traders, however, are already widespread. And even the standard trading software or trading through a Web browser allow the use of charts and other analysis tools. Big advantages to limit losses are automatic stop-loss orders and orders to take profits when the price has risen enough.
Start trading Forex now!
Here is an overview and a comparison of the best Forex Brokers!