Forex has been getting a lot of publicity over the past few years and has attracted many new traders working from home. Experienced and new stock traders alike are looking to diversify into currency trading and question if they should trade forex vs stocks. Many are wondering if the Forex is really that great of a market or if it’s just hype. But as a matter of fact, for the small retail trader, the forex does offer many advantages. So what makes the Forex so different from the Stock market? Before we discuss that, let’s first look at what exactly is the forex market and how it works.
Forex is a Global Market
Foreign currency trading is a global affair. You are not limited to only trading the currency of your own country. Forex is an over-the-counter market and there is no central exchange or clearing house. For the small retail trader this translates into several advantages trading the forex over the stock market.
Forex is a 24-Hour Market
The forex market is a true 24-Hour market. Trading opens on Monday morning in Australia (Sunday evening US time) and does not close until Friday afternoon in the USA. This can be of great advantage for anybody who needs to trade outside of normal business hours in their own country.
While speculative stock trading is difficult if you cannot access the internet during the day, you can always trade currencies in the evening, night or early morning hours. However, this does not mean you can necessarily trade 24/7, unless you find a broker that is open for business 24/7. Most US brokers operate between Sunday 4:00PM through Friday 4:00PM EST and are closed for a short weekend. However, since you have access to trade the Asian, European and US sessions you have virtually unlimited possibilities to trade around the clock.
Forex is a Two Way Market
When trading stocks, you are limited to buying a stock that you think will rise or selling a stock you think will decline. Forex, however, is always an exchange: in order to buy one currency you must simultaneously sell another. You cannot buy US dollars with US dollars. So you are always dealing in a currency pair, and this means that you can open a trade in either direction. As with stocks you can buy the pair (in fact, buy the base currency) if you think that the value of the base currency relative to the quote currency will rise, but you can also do it the other way around. That is, you can begin by selling the pair (selling the base currency to buy the quote currency) if you think that its value will fall.
Forex has no Uptick Rule
Stock trading has a restriction called the uptick rule. This rule limits the selling or shorting of a stock except on an uptick, meaning that every short must be transacted at a price higher than a previous trade. Currencies are not subject to this rule: you can sell a currency pair at any time and at any price, regardless if the pair is moving up or down. This translates into the ability to trading long or short and ultimately provides you with more diverse trading opportunity.
Forex is a Transparent Market
Market price and valuation of a stock are directly affected by the performance of a company whose figures could be manipulated or known to insiders for some time before revealed publicly. Currency prices, on the other hand, are driven by the economic performance of a whole nation. It is virtually impossible to manipulate an entire economy and hence the forex is much more transparent. This means that you as the small retail trader, working from home, don’t have to be in the loop of private financial information. Therefore trading currencies is on a much more level playing field than trading stocks.
Forex Markets have great Liquidity
Today, the daily turnover in the currency markets amounts to trillions of dollars per day and this volume is increasing steadily. Realize that this is more than the total of all of the world’s stock exchanges added together. What’s more, there are only a limited number of possible currency pairs compared with probably hundreds of thousands of stocks. With so much money concentrated in such a limited arena, price manipulation by the bigger players is much less of a problem, if it exists at all.
As you can imagine, such high liquidity also means that it is extremely unlikely that a trade you place in any of the major currency pairs would have difficulty getting filled. Of course this does not mean you won’t experience slippage from time to time, particularly if you trade during slower market hours. Trading in a liquid market is a huge advantage, especially if you are trading large positions.
Forex offers Higher Leverage and Different Accounts
In the past forex brokers routinely offered leverage of 200:1 or even more. Today, leverage in the forex is limited to 50:1 when trading the majors and 20:1 when trading other pairs. While leverage in the forex has decreased, it is still higher than in other markets. And remember, leverage is a double edged sword: it can work for you and against you.
Most forex brokers offer different types of accounts ranging from micro, the smallest account, to mini and standard accounts. The various accounts allow traders to work with different lot sizes and leverage. For example you might be able to trade 1,000 units with 0.01 leverage in a micro account as compared to 100,000 units with 1.00 leverage in a standard account.
While a “Standard Forex Account” typically requires a minimum investment of $10,000 or more like a stock broker account, it is possible to open a mini or micro account with just a few hundred dollars. This allows you to get started with currency trading with a minimal investment. Another option you might consider is opening a forex demo or virtual account with a broker. A demo account lets you test drive the forex without risk so you can determine if trading the forex is right for you.
Forex – some History
So if forex trading has so many advantages, why is it that it hasn’t been popular until recently? The answer is that the market itself only emerged in the 1970s when exchange rates stopped being permanently pegged by the ‘gold standard’ and were allowed to fluctuate. And even then, it was only the banks, hedge funds, and high worth individual investors, in a nutshell the big players who had access to trading currencies. There were no small retail investors calling up their broker to place a trade as it was the case in trading stocks. It was not until the development of the internet that the forex market opened up and the question of “trade stocks or trade forex” became a real choice for retail traders