Global Money Market Basics Series - Why Traders Prefer The Market
Why trade Forex - the advantages of Forex trading
Forex trading has many advantages. Here are a few reasons why so many people choose the currency markets:
no commission
There are no clearing fees, exchange fees, government fees, and brokerage fees for currency transactions. Most Forex retailers earn their income through so-called "spreads".
No trading lot requirements and restrictions
In the futures market, the number of trading contracts must be an integer number of hands, and the amount of margin required for one hand is determined by the contract size and the exchange. In Forex spot trading, you are free to decide your trading position size, which allows traders to trade with a minimum account of 25 no (but it is a bad idea to trade with only 25 dollars, we will explain why this is later) .
low transaction costs
Under normal market conditions, retail Forex transaction costs (ask spread) are usually less than 0.1%. Some brokers may even offer spreads as low as 0.07%. Of course, the specific transaction costs depend on your leverage.
24 hour market
From the opening in Australia on Monday morning to the close in New York on Friday, the currency markets never sleep.
This is very attractive for those who want to trade on a part-time basis, because you can freely choose when you want to trade: morning, noon or evening.
no one can monopolize the market
lever
lever
In currency trading, smaller funds can control larger contract sizes. Leverage allows traders to control risk while making handsome profits.
For example, a Forex broker might offer 50x leverage, meaning that a $50 margin deposit would allow a trader to buy and sell $2,500 worth of currency.
high liquidity
high liquidity
Because the money market is huge and extremely liquid. This means that under normal market conditions, with the click of a mouse, you can get an instant deal because there is always someone in the market willing to trade in the opposite direction of yours.
low barriers to entry
You might think that being a currency trader requires a lot of initial capital. In fact, the barrier to entry for currency trading is low compared to stock, option or futures trading. Forex brokers offer "mini" and "micro" trading accounts, some with minimum deposits as low as $25.
We're not saying you should open an account with a minimum amount, but it does make currency trading easier for those who don't have much to start with.
Abundant learning resources
Most Forex brokers provide a demo account, you can use the demo account to train your trading skills, perfect your trading system, and then enter the market with real money. At the same time, most brokers provide real-time Forex news and chart services.
Now that you know the advantages of the currency market, let's see how it compares to the stock market.
Comparison of Forex and Stocks
There are about 2,800 stocks listed on the New York Stock Exchange. Nasdaq has more than 3,100. If you are a stock trader, how do you choose stocks? Do you have enough time to research so many companies?
In the Forex spot market, dozens of currencies are being traded, but most market participants trade a few major currency pairs. This saves a lot of energy than picking stocks.
The above is just one of the many advantages of the currency market. Other advantages of the currency market are listed below:
24 hours non-stop market
The currency market is a 24-hour seamless market. Most brokers are open from 4:00 pm Sunday to 4:00 pm EST Friday, and customer service is usually available 24/7. You can customize your own trading schedule and trade at any time of the day.
low or no commission
Most brokers do not charge commissions or additional transaction fees when traders place orders online or over the phone, and only make profits through so-called "spreads".
Market orders can be executed instantly
Your market order will be executed immediately under normal circumstances. Usually the price displayed when you execute your market order is the price at the time of your transaction.
Remember that the broker only guarantees that your stop, limit and entry orders will be filled under normal market conditions. In extremely short-term circumstances, such as large-scale wars and alien invasions, the transaction is not under "normal market" conditions, and order execution may encounter delays.
Shorting without restrictions and additional costs
Unlike the stock market, the currency market has no restrictions on shorting. Regardless of whether a trader is long or short, and no matter which way the market is functioning, there are trading opportunities in the currency markets.
Since currency trading always involves buying one currency and selling another, there is no structural bias against the market. Whether the market is trending up or down, bullish or bearish, you can find trading opportunities.
No middleman to make the difference
The currency market is over-the-counter, without an exchange. The exchange system has many advantages, such as sufficient supervision, etc., but the exchange system will inevitably involve the participation of middlemen. Either side of the buyer and seller has to pay a cost for this, and this fee may be collected immediately or delayed.
On the other hand, the trading of currency pairs is fragmented, which means that different brokers may quote differently. The competition among brokers is fierce so that you as a trader can get lower costs.
no one can control the market
You may have heard of some cases where a certain fund or a certain company manipulated stock prices, and if it was not manipulation, the inflow and outflow of large amounts of funds could easily affect a certain stock or small-cap futures market.
In currency trading, the sheer size of the currency market makes it extremely unlikely that any one fund or bank will control a currency.
Banks, hedge funds, central banks and high net worth individual traders are just some of the participants in the currency market. In this market, liquidity is very strong.
Analysts and brokers are unlikely to influence the market
You may have heard a well-known analyst's advice on stock operation on TV, and these remarks sometimes have an impact on the trend of this stock. There are more or less interests between analysts and listed companies or large fund companies, and their remarks are not completely objective.
The huge size of the currency market determines that analysts have little influence on the exchange rate, and they are only analyzing the currency market without stakeholders.
Comparing Currencies and Futures
fluidity
fluidity
In the currency market, the daily trading volume is more than 5 trillion US dollars, which is the most liquid market. The volume and size of deals that this market can absorb dwarfs other markets.
The daily trading volume of the futures market is about 30 billion U.S. dollars, which is a bit small compared to the 5 trillion U.S. dollars in the currency market. This means that under normal market conditions, trading orders can be effectively executed with less slippage.
24 hour market
The Sydney market begins trading at 5:00 pm ET on Sunday. Tokyo markets open at 7:00 p.m. ET, followed by London at 3:00 a.m. ET. Finally, New York markets open at 8:00 AM ET.
Before the New York market closes, the Sydney market opens again - it's a seamless 24-hour market!
As a trader, this allows you to react quickly to any news.
If there is an important data release from the UK or Japan while the US market is closed, the market could be volatile at the opening of the next day.
The overnight market in the futures contract does exist, and although the liquidity is improving, compared with the Forex spot market, the transaction is still light.
low or no commission
As electronic newsletter brokerages have become more popular over the past few years, it has become possible for brokerage firms to ask you to pay a commission.
But in reality, this commission is insignificant compared with the commission you pay in the futures market.
The competition among spot Forex brokers is so fierce that you can get very low transaction costs.
price certainty
In currency trading, under normal market conditions, you can get an instant deal at the current market price. In contrast, futures and stock markets are not necessarily able to trade at current market prices.
The price quoted by the broker is often the transaction price of the last transaction, not necessarily equal to the actual transaction price.
limited risk
To control risk, traders must have position limits.
If the required margin amount exceeds the available funds in the account, you will receive a margin call automatically generated by the online function of the trading platform. Under normal market conditions, all open positions will be closed immediately if funds are available and the required margin is available.
Whereas in the futures market, your position may be liquidated at a loss greater than the amount of funds in your account, and you will be responsible for the resulting account deficit.
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