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The Benefits Of Trading The Forex Market
from: Marquez ComelabHistorically, the FX market was available most to major banks,
multinational corporations and other participants who traded in
large transaction sizes and volumes. Small-scale traders
including individuals like you and I, had little access to this
market for such a long time. Now with the advent of the Internet
and technology, FX trading is becoming an increasingly popular
investment alternative for the general public.
The benefits of trading the currency market:
It is open 24-hours and it closes only on the weekends;
It is very liquid and efficient;
It is very volatile;
It has very low transaction costs;
You can use a high level of leverage (borrowed money) with ease;
and
You can profit from a bull or a bear market.
Continuous, 24-Hour Trading
The currency exchange is a 24-hour market. You may decide to
trade after you come home from work. Regardless of what
time-frame you want to trade at whatever time of the day, there
would be enough buyers and sellers to take the other side of
your trade. This feature of the market gives you enough
flexibility to manage your trading around your daily routine.
Liquidity And Efficiency
When there are a lot of buyers and a lot of sellers, you can
expect to buy or sell at a price that is very close to the last
market price. The currency market is the most liquid market in
the world. Trading volume in the currency markets can be between
50 and 100 times larger than the New York Stock Exchange
(Source: Oanda.)
When you are trading stocks, you may have experienced events
where one piece of news accelerates or decelerates the price of
the underlying stock you may have bought into. Perhaps a
director has been kicked out by the shareholders of a company or
the company has just released a new product and big investors
are buying the shares of a particular company. Share prices can
be drastically affected by the actions or inactions of one or a
few individuals. So if you are relying on television reports and
newspapers to get your news, most of the opportunities or
warnings will have come too late for you to take advantage by
the time you get them.
The value of currencies on the other hand is affected by so many
factors and so many participants that the likelihood of any one
individual or group of individuals drastically affecting the
value of a currency is minute. Because of its sheer size, the
currency market is hard to manipulate. The ability for people to
engage in 'insider trading' is virtually eliminated. As an
average trader, you are less disadvantaged. You are likely to be
playing on relatively equal ground along with all the other
traders and investors whom you are competing against.
Note about price gaps:
For those people who have already traded other markets, you
probably know about price 'gaps'. 'Gaps' occur when prices
'jump' from one price level to another without having taken any
incremental steps to get there. For example, you may be trading
a share that closes at $10 at the end of today but due to some
event that happens overnight; it opens tomorrow at $5 and
continues to go downwards for the rest of the day.
Gaps bring about another degree of uncertainty that may meddle
with a trader's strategy. Probably one of the most worrying
aspects of this is when a trader uses stop-losses. In this case,
if a trader puts a stop-loss at $7 because he no longer wants to
be in a trade if the share price hits $7, his trade will remain
open overnight and the trader wakes up tomorrow with a loss
bigger than he may have been prepared for.
After looking at a couple of forex charts, you will realize that
there are little price 'gaps' or none at all, especially on the
longer-term charts like the 3-hour, 4-hour or the daily charts.
Volatility
Trading opportunities exist when prices fluctuate. If you buy a
share for $2 and it stays there, there is no opportunity to make
a profit. The magnitude of level of this fluctuation and its
frequency is referred to as volatility. As a trader, it is
volatility that you profit from. Large volume transactions and
high liquidity combined with fewer trading instruments generate
greater intra-day volatility in the currency market that can be
exploited by day-traders. The high volatility of the currency
market indicates that a trader can potentially earn 5 times more
money from currency trading than trading the most liquid shares.
Volatility is a measure of maximum return that a trader can
generate with perfect foresight. Volatility for the most liquid
stocks are between 60 to 100. Volatility for currency trading is
500. (Source: Oanda.)
In this respect, currencies make a better trading vehicle for
day-traders than the equity markets.
Low Transaction Costs
A currency transaction typically incurs no commission or
transaction fees. For a forex trader, the spread is the only
cost he or she needs to cover in taking on a position. In
addition, because of the currency market's efficiency, there is
little or no 'slippage' costs.
'Slippage' is the cost involved when traders enter the market at
a price worse than the level they wanted to get into. For
example, a trader wants to buy a share at $2.00 but by the time,
the order gets executed, his gets to buy the shares at $2.50.
That fifty cents difference is his slippage cost. Slippage cost
affects large-volume traders a lot. When they buy large
quantities of a commodity, it oversupplies the market with buy
orders. This applies a pressure for the price to go up. By the
time they get to buy all the quantities they wanted, the average
price they got their commodities would be higher than the price
they intended to get them for. Conversely, when they sell large
quantities of a commodity, they oversupply the market with sell
orders. This applies a pressure for the price to go down. By the
time they finish selling all their commodities, their average
selling price is less than what they initially intended to sell
them for.
Due to lower transaction costs, minimum slippage and strong
intra-day volatility, individuals can trade frequently at small
costs. As an approximate, you may only expect to have a spread
of 0.03% of your position size. To give you an example, you can
buy and sell 10,000 US Dollars and this will only incur a
3-point spread, equivalent to $3.
Leverage
There are not a lot of banks or people who would lend you money
so that you can use it to trade shares. And if there are, it
would be very hard for you to convince them to invest in you and
in your idea that a certain share is going to go up or down.
Therefore, most of the time, if you have a $10,000 account, you
can only really afford to buy $10,000 worth of stocks.
In currency trading however, because you use 'borrowed money',
you can trade $10,000 of a currency and you only need anywhere
between fifty (For a margin lending ratio of 200:1) to two
hundred dollars ( For a margin lending ratio of 50:1) in your
trading account. This makes it possible for an average trader
with a small trading account, under $10,000 to be able to profit
sufficiently from the movements of the currency exchange rates.
This concept is explained further in The Part-Time Currency
Trader.
Profit From A Bull And Bear Market
When you are trading shares, you can only profit when the price
of a stock goes up. When you suspect that it is about to go down
or that it is just going to be moving sideways, then the only
thing you can do is sell your shares and stand aside. One of the
frustrations of trading shares is that an individual cannot
profit when prices are going down. In the currency market, it is
easy for you to trade a currency downward so that you can profit
when you think it is going to loose value. This is easy to do
because currency trading simply involves buying one currency and
selling another, there is no structural bias that makes it
difficult to trade 'downwards'. This is why the currency market
has been occasionally referred to as the eternal bull market.
Marquez Comelab, © 2006. This is an excerpt, modified from the
book: The Part-Time Currency Trader.
About the author:
Marquez Comelab is the author of the book:
Trader . It is a guide for working men and women interested
in trading currencies in the forex market. See:
and
om for more.
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