Advantages of Forex
Basically
in Forex one can begin trading with no real money at risk in a demo account... start
small with a mini-account, literally playing for 'nickle and dimes' as you
learn, then graduate to a larger account and trade for higher stakes. And
again, you set the size and the pace of all this activity on your own since all
the trading is done through software screens. There's no actual broker to call
and yell "buy... no, sell!" into the phone. Of course there is always
a phone number where you can call for support or to make a backup trading order
in the event you lose your internet access for some reason (computer crash,
storm blackouts, etc.) You can't really start small in the stock market because
lot sizes are both fixed and larger and there isn't remotely enough leverage available,
especially for the novice trader.
Outstanding Liquidity
Forex
is a computerized network that can handle a very large volume of transactions, representing
nearly 4 trillion dollars a day on average, as noted earlier. This means that buyers
and sellers are almost instantly available when you want to open or close a trade.
Any stock market trader can give you nightmare stories of not being able to get
an order filled at a price he wanted due to little or no action being available
for the particular stock or option he was looking to move.
Unbelievable Leverage
Unlike
the stock and futures markets where leverages are relatively small (5:1 ,
10:1... but only for the bigger players with lots of equity to collateralize),
Forex trading routinely allows for much higher leverages: as large as 50:1 max
after the regulatory changes of 2010. These new rules apply to US-based brokers
only -- many offshore brokers still offer 50:1+, but these are off limits to
US-based traders now anyway as those same rules require us to stick with
domestic brokerages. These new rules will likely remain in force for at least a
decade I would imagine, barring some economic disaster that might cause
Congress to go back in and make still more legislative changes to further
control the financial markets.
Regardless,
that's a lot of borrowing power. This is made possible because the relatively
small daily movements of currency prices (a 1% daily move would be considered
enormous, whereas stock prices can easily change 15-20% in a day under volatile
circumstances) make it safe for the broker to lend the trader a large block of cash
so that his pip value makes it worthwhile to trade. I'll explain how all the
math works in a moment to make this clearer. Just know that the high
leverage in Forex trading provides an entry point into the market for the small
trader that just doesn't exist in the stock, commodity and to a lesser extent
the futures markets.
Of
course, leverage can cut both ways and wipe you out as fast as it makes you a
fortune if you are reckless and don't manage your risk appropriately. It's this
leveraged potential that creates both the higher risk in Forex and the ability
to make a large amount of money starting with a small amount of seed capital.
Make sure you are clear on this concept.
24/7
Action
The
Forex market is operational around the clock for five days a week. It
effectively closes from about 3PM EST on Friday and re-opens at 5PM Sunday at
the start of the new trading week (which is Monday morning in Sidney and
Tokyo). This timeframe generally follows the schedule of the world's banking
industry. You can play with your Forex account early in the morning or in the
middle of the night. Somewhere on Earth the banks are humming along!
Simplified
Trading Choices
There
are approximately Four thousand Five hundred stocks listed on the New York Stock exchange. Another 3,500
are listed on the NASDAQ. Which one of these 8000 possible companies will you
trade? Ugh. In currency trading the majority of the market trades the 4-6 major
pairs. Keeping an Eye on four pairs is much easier than focusing on thousand of stocks.
No
Standard Commissions
Forex
brokers earn their money by setting spreads between the BID and ASK prices which
they buy and sell the various currencies at. I'll explain all this in a moment,
but briefly it works like this: when you open a trade with a BUY order, you
must purchase the currency at what is known as the ASK price. When you eventually
close this trade you will then sell back into the market at the BID price.
To
clarify, you can buy a currency at the market ASK price (you must
"give them what they're asking"), or sell it at the BID price (the
highest "bid" the market offers). This means that whenever you open a
trade you are automatically down by the spread -- and must recover this amount
to reach breakeven. From that point on it's all profit.
No
Insider-Trading
Forex
trading is considered to be the perfect system of competition since all players
are presented with an equal and level playing field. Fundamental information
about a nation's economic policies and the scheduled release of economic news
that affects currency prices is all public knowledge and completely accessible
to every trader on the planet who cares to keep tabs on it, large or small.
This means that nobody can cheat by possessing "insider information"
of any sort. There's no such thing in Forex.
In
addition, the fact that financial decisions within banks and governments are
usually kept private until being executed with little or no prior warning makes
it impossible to know WHEN these price-effecting events will actually occur. We
can know when they are LIKELY to occur -- but can never know exactly when, for
instance, a banker in Sidney is about to dump 5 million Yen on the market or a
government official in Zurich has instructed his financial minister to buy up 2
billion Euros that afternoon. The private nature of money creates permanent
uncertainty about the movement of prices that can never be completely
eliminated, and therefore affects all players in the market equally.
The
trick is to analyze the market for signals that improve your odds of knowing
what's about to happen next -- but you can never be 100% certain. If that were
the case the market would collapse because it's essentially a zero sum game
requiring a loser for every winner.
