Trading in the foreign exchange market can be dynamic, exciting and lucrative. While investors have many options in the global investment and speculation marketplace, forex offers advantages over other types of speculative financial vehicles.
Compared with Futures and Stocks
In some ways forex trading is much like stock trading. Buying stocks and other equities for the long term is an investment. Buying the same products to profit from short term price movement is speculation. Most often, traders trade foreign currency in the forex market for speculative reasons that can be compared to the short term purchase of stocks or other equities. Most often, the goal of forex traders is to buy currencies, hold them for a short period, and then sell them with the intent of profiting by favorable changes in price.
Despite these similarities to futures and equities trading, the forex market differs from futures and equities markets in advantageous ways:
24 hour market
Whereas futures, and especially stocks and other equities are usually only traded during business hours, forex is traded in a 24 hour market. Investors can participate in the market at any time, 24 hours per day, excluding only a short period on weekends. If you have Internet access forex Brokers connect can connect traders to their trading platform, to allow access from anywhere at almost any time.
Ease of Short-Selling
A trade is considered to be "long" when it involves the purchase of an asset. A trade is considered to be "short" when it is a sale of property not yet owned, or perhaps purchased on margin. Therefore, short selling refers to the practice of selling an asset that you do not yet own. Short sellers benefit when the price of the asset decreases. Short selling in huge volumes can help to drive down the price of a stock to fall to the profit of the short sellers. For that reason, short selling in stock markets is restricted to help prevent manipulation of stock prices and unfair opportunities for some investors.
Not so in forex markets.
In fact, even the concept of "short selling" has less meaning for forex trades. In the forex market, every trade necessarily includes a purchase of one currency and a sale of another-essentially a long-buy and a short-sell simultaneously. Whether the market is rising or falling is merely one factor or a matter of perspective in trading currencies.
For example, if a trader expects the U.S. Dollar to fall relative to the Canadian Dollar, he would sell USD (U.S. Dollars) and buy CAD (Canadian Dollars). The transaction generates both a long position in Canadian Dollars, and a short position in US Dollars - a net neutral position, until the relative price of the currencies changes.
For that reason, short-selling is not an issue, and is not regulated in the forex market.
Another advantage of forex trading over stocks and futures is the commission structure. Most forex brokers do not charge a commission on a trade. Their fee is a share of the "spread" of each trade, which is the difference between the buying and selling price, (the bid and ask prices).
Immediate Order Execution and Price Certainty
Stock or futures transactions can take time to occur. From the moment that an order is placed, a transaction in futures or equities can take minutes or even hours to complete, depending on the technologies employed and the volume of trading in the marketplace. Those delays can be challenging to the nerves and to the back account, since in the time that the order takes to execute (or "fill"), the equities or futures price might have changed substantially-a factor usually called slippage.
In contrast, online forex transactions are usually immediate; they are effective as soon as the trade order is submitted by the click of a computer mouse. Because of that immediacy, the trade price is known at the time of the order. There is no surprising slippage, and seldom any of the uncertainty that accompanies stocks or futures orders.
Manipulation Is More Difficult; Analysis Is Easier
Sometimes markets are susceptible to manipulation, especially if they are fairly small or if there few trades taking place. Those same conditions can make a market difficult to analyze, because prices can be volatile and subject to change in response to relatively small pressures.
Price Certainty and Liquidity
The forex market is the largest in the world with $3.2 trillion changing hands each day. It is also very volatile, as traders can react to situations in real time and the market moves in response to those reactions. Yet the Internet basis and resulting quick trade execution of forex markets provides for both liquidity and price certainty. A trader can enter or exit the market at any time in most currencies, making it a liquid market. Since trades are made in real time, the price locked when the trade is made, resulting in none of the slippage experienced in equities or futures markets, and therefore providing price certainty.