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Forex Currency Exchange Rate Article
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Major Advantages to Trading Forex
from: Francis GillenWhen most investors hear the word forex, the words that flash
through their brain are "risky," "complicated," and "tiny profit
margins." This is because the information on currency trading
isn't as available and easy to access as the stock market. A
stock investor just needs to pick up the Wall Street Journal or
turn on CNBC to instantly see what's new and exciting. When
you're a stock investor, you can talk to your friends,
neighbors, and co-workers about what you're buying, share tips,
and brag about your profits. Everyone is familiar with the stock
market. Forex is a different beast. To find information, you
have to turn to the internet or privately run newsletters. You
can't talk about forex with anyone in your everyday life because
they won't understand the lingo and will have no idea what
you're talking about. It's a shame, because our game has some
major advantages over stock trading. Maybe if forex information
was more public, the average investor would realize the
following 5 things to be true.
One thing that most people doesn't realize is that there is no
trading commission involved in currency trading. When you're
trading stocks frequently, even if it's done online at $20 a
pop, the fees start eating into your profits. If you're trading
options, you're not only paying a commission on the trade, but
you're also paying additional fees per contract. Fortunately for
forex investors, the only retail transaction cost is the bid/ask
spread which is usually less than 5 pips (0.05%).
Secondly, the currency market is open 24 hours a day, 5 days per
week. Unlike the stock exchange, which is only active between
the opening and closing bells, you can trade forex first thing
in the morning or in the wee hours of the night. There are
people all around the world trading at all hours, so a trader
can take advantage of any market condition at any time.
Another big benefit to the foreign exchange is the huge leverage
opportunity. Leverage, also called margin, is when you borrow
your broker's money and add it to your own capital in order to
make a larger investment. In the stock market, you have to pass
your brokers strict guidelines to be approved for a margin
account, and if you do, you'll get a maximum of 2:1 (which means
if you invest $10,000, you can borrow $10,000). In forex, a
ratio of up to 400 is considered normal. If you use that massive
amount of leverage properly and hit some big winners, you can
make substantial money in short periods of time. Of course, the
opposite is true as well. You can lose substantial money very
quickly also. But you can't get a better opportunity to use
other people's money.
A fourth advantage to currency trading is it's size. Because the
forex market is so huge and has so many traders active at all
times, no single investor can corner the market. In the stock
market, each equity issue has a finite amount of outstanding
shares. For many small cap companies, a large investor could
amass a large percentage of those outstanding shares, and
because of the low liquidity, their choice to buy, sell, or hold
will have drastic effects on the price of that particular stock.
With currency, no single investor, not even a central bank, can
accumulate a controlling amount of something like the dollar,
pound, or franc.
The last great characteristic of the forex that we'll discuss in
this article is the never ending bull market. Forex is a zero
sum game. A gain is only made when one currency rises in value
in relation to another currency. So this means that if one
currency is going down, another is going up. In the stock
market, when a bear market hits, the vast majority of stocks are
all going down. If Microsoft drops 5 points, that certainly
doesn't mean that GE went up 5 points. Sure, you can short
stocks in a declining market, but the average investor isn't too
keen on the unlimited downside risk and probably doesn't even
have the margin to be able to make the trade. Just remember that
something is always guaranteed to go up in the currency market.
There are dozens of other reasons why the forex is one of the
best playing fields in the investment world. If you are an
investor, do some research and see for yourself. Open up a demo
trading account at one of the several online forex brokers and
see how you do. You might just find that it blows the stock
market out of the water.
About the author:
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