The foreign exchange market has often been the market of choice for many savvy traders, commonly being preferred over bond, stock and commodity markets for its liquidity and other desirable characteristics.
Furthermore, although many top traders have been trading currencies for years either via bank credit lines or currency futures, the relatively recent availability of the Internet and online retail forex brokerage accounts has opened trading in the international currency market up to just about anyone with an online computer and some funds to place at risk.
Online retail forex brokerage accounts have recently given smaller investors the chance to trade in the multi trillion dollar forex market for the first time. This has opened up the market that was formerly the milieu of large banks and multi-national financial corporations for many years before the Internet leveled the playing field somewhat and gave access to the forex market to retail traders.
Small traders were previously confined to trading in the stock market, the commodity futures market and the options market, where retail brokerage accounts have pretty much always been available.
Also, futures on currencies have only been available since just after exchange rates began to float in 1972. At one time, these contracts represented the only way for retail traders to participate in the global foreign exchange market.
Forex Advantages Versus Stock Trading
A number of clear advantages to traders exist in the forex market that cannot be found in other markets like the stock market. For example, popular features of the forex market versus the stock market include:
- Market Hours – the global currency market is open 24 hours a day, five days a week, representing the longest continuous trading hours of any financial asset. On the other hand, local stock markets are generally only open during normal business hours and the stocks cannot be traded outside of those hours, other than on thin overseas markets, and then only for the largest stocks.
- Liquidity – no other market offers the depth and immediacy of the forex market. Round the clock trading by the world’s largest banks and international financial institutions make the forex market the most liquid market in the world. Because of the size of the forex market, a dealer or market maker is always ready to assume either side of a trade. This contrasts with the market for many smaller stocks which can be highly illiquid.
- Costs – commissions and spreads incurred when trading stocks can be quite expensive for active traders. Forex transactions however, cost much less in comparison, if anything, and most currency pair quotes feature tight bid offer spreads. This makes trading forex far more cost efficient for active traders.
- Leverage – probably the best reason for trading the forex market versus trading the stock market from a trader’s perspective. Trading stocks requires half of the stocks’ value or 50% to be put up as collateral for trading, while trading in the forex market requires only a small fraction of the notional value of the currency to be put up as margin because the trade is based on a rate of exchange, rather than on a purchase. The rate of exchange is initially of equivalent assets, i.e. the two currencies involved in the transaction. This allows retail forex brokers the possibility of extending the leverage ratio on margin accounts up to one unit of margin to control as much as 500 units of the base currency. This represents a potentially very attractive margin percentage of just 0.2%.
- Selection of Trading Vehicle – unlike stocks, of which hundreds of thousand exist, the majority of forex trading happens in just eight major currency pairs versus the U.S. Dollar, and a few popular cross currency pairs. This makes selecting a currency pair to trade so much easier than selecting a trading asset among the myriad available stocks.
Readily Available Online Forex Trading Platforms
In addition to all of the forex market advantages mentioned above, the online forex market has developed to the point of having an impressive presence on the Internet. The market also features some of the most comprehensive and intricate trading platforms available.
Many of these sophisticated forex platforms not only incorporate extensive technical analysis functionality, but they are even capable of automating a trading system or running commercial expert advisor software specifically developed for that purpose.