Why Forex?

[alayoua]

WHY FOREX?

 

Faced with a vast array of markets and securities to trade it’s small wonder that retail traders often ask why they should specialise in forex and not equities, futures, or commodities? What are the major benefits to trading forex over and above trading other markets? What has underpinned the massive growth in the retail forex market over the past ten years?

 

Not all traders are ‘fans’ of forex trading and justifiably they’ll point out the faults, some of which we’ll talk through and debunk during this article to arrive at the conclusion as to why trading the FX markets, as a retail trader, makes perfect sense.

 

Limited Choice

When you consider that there are circa 4,500 stocks listed on the New York Stock exchange, 3,500 on the NASDAQ and that this is only one country’s bourses which equities will you decide to trade? Will you simply trade any equity according to; fundamentals, the noise from the squawk, or Bloomberg or Reuters, will you attempt to get in front of their numbers and results? Perhaps you’ll choose to do some technical analysis, the most basic being is the equity “overbought” or “oversold” in relation to its sector? An impossible management task for even the most sophisticated hedge funds, investment banks and algorithms.

 

I know equity traders who only trade certain sectors and drill down their trading to only a select few US stocks in that sector, for example, Google, Apple, Microsoft, Verizon. The irony is that these contacts of mine are adopting the same principles a successful forex trader would adopt, by only selecting 3-4 equites to trade they are mimicking similar behaviour to that of an FX trader who selects perhaps 4 pairs to monitor for the right set up.

 

Low Barriers to Entry

Many ‘anti’ FX traders will refer to the low barriers to entry in the FX market as a draw back when in fact it’s a huge benefit. Many traders will arrive at the markets due to a change in personal circumstances or a desire to seek out a new direction or challenge. Why should that desire be hampered by restrictive entry capital? Used correctly the leverage permitted in FX trading can always work to the trader’s advantage. Far better to risk and obligate €5000 to your new business venture as opposed to risking €50000, surely whilst learning any new self employed profession the less risk you take the better?

 

Liquidity and Size of Market

The FX market dwarfs all stock markets in volume. The figures for FX transactions are put at circa $4 trillion each day. Estimates put the New York Stock Exchange (NYSE) trading at circa $30 billion a day. The entire U.S. stock market trades circa $200 billion daily. The Futures market trades circa $500 billion daily. In terms of liquidity nothing surpasses the FX markets and whilst there are times during the day when the trading of certain pairs falls away, the market is, (during the Sun – Fri open) always ‘open’. The forex market is a seamless 24-hour market. The vast majority of brokers are open for business from Sunday at 4:00 pm EST until Friday at 4:00 pm EST, with their dedicated customer service divisions usually available 24/7. With the ability to trade during the U.S., Asian, and European market hours, you can easily customise your own trading schedule to fit around these market times.

 

Spotting Your Trades

In spot currency trading there are dozens of currencies traded, the majority of market players trade the four major pairs. Four pairs are much easier to trade than thousands of stocks. Even if you look for the same set up to occur on more currency pairs, (perhaps as many as nine pairs before correlations render it excessive), traders can monitor this level of activity quite simply.

 

Low Costs

The vast majority of reputable forex brokers charge little or no commission or additional transactions fees to trade currencies online or over the phone. Combine this with the tight, consistent, and fully transparent spreads and you quickly realise that forex trading costs are lower than those of any other market. Most brokers are compensated for their services through the bid/ask spread. The spread you’re charged is their profit.

 

Straight Through to the Market, No Intervention

Your forex trades are instantly executed under normal market conditions. Under these conditions, usually the price shown when you execute your market order is the price you get. You’re able to execute directly off real-time streaming prices. However, many brokers only guarantee stop, limit, and entry orders under normal market conditions. Trading during a market event, such as NFP day, or a Greece prime minister putting his country’s EU membership to a referendum, would not fall under the description of “normal market” conditions. Fills are instantaneous most of the time, but under extraordinarily volatile market conditions order execution may experience slight lagging delays.

 

Limited Risks

Forex trading offers the advantage of limited risk, one of the biggest advantages over the futures market. When you buy a futures contract, you are obligated to buy or sell a specific amount of a specific security or commodity at a specific time for a specific price. If you buy a futures contract to sell oil and news breaks that Renault are giving away water powered trucks and cars and Ford etc will follow suit, then the price on your contracts will drop through the floor, limits will drop, and you could be buried in your position finally taking massive losses. This could not happen in the forex market were you can simply exit your position.

 

No Restrictions

There are no restrictions on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, whichever way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural ‘bias’ to the market. Therefore you always have equal access to trade in a rising or falling market.

 

Lower Margin Requirement

Margin requirements are significantly lower in forex trading than equity or futures trading. Whilst the level of margin allowed is determined by each broker, the restrictions are usually much less stringent when trading forex. Margin allows the investor to leverage, theoretically you borrow from the broker to invest in your own account. While this can be risky, it can also be very lucrative and profitable.

 

For example, you have €10,000 of your own money to invest, if you open up a margin account at an equity broker, you can usually margin up to 50% of the value of stock. So if you buy €10,000 in Apple stock, you can borrow another €5,000 to own a total of €15,000 in value. With your forex account, the margin requirement is often as low as 1%. Which means that if you buy €10,000 in Euros, you can use your broker’s money to buy another €1,000,000. So technically you own over $1 million in Euros.

 

If the value of each investment increases by 10% then your €15,000 in Apple stock is now worth €16,500. You then sell it, ‘pay back’ the €5,000 you borrowed, and you remain €1,500 in profit. Your return on investment (ROI) is 15%. If your Euros went up 10%, your €1 million is now worth €1.1 million. After selling and repaying your broker, your profit is €100,000 before any interest. That’s a return on investment of over 1,000%. Naturally you have to be careful when trading on margin, if the transaction highlighted went against you then you’d be in a much bigger drawdown in the forex scenario, however, you can close the trade before you reach such extremes. The potential for enormous gain is obvious, the major reason why forex trading attracts serious investors.

 

No Middleman

Centralised exchanges can provide many advantages to the trader. One drawback with centralised exchanges is the involvement of middlemen. Parties located in between the trader, buyer or seller of the security add a layer of cost. The cost can be quantified either in time, fees or both. Spot currency trading is decentralised, quotes vary from different currency dealers and liquidity providers. Competition is so fierce that you are always assured that you get the best quotes. Forex traders get quicker access and cheaper costs. With the advancement of ECN, NDD and STP and as the liquid pools of quotes from banks is constantly changing you can be assured that the quote you obtain will be as close to the best the market can provide.

Read the full story.....

Editat Decembrie 12, 2011 de Stefan
removing the link from the post body

[deleted on request 01]

in forex costurile de tranzactionare nu sunt mici. daca iti poti permite sa tranzactionezi la bursa cu un capital mare costurile sunt mult mai mici pentru ca indiferent de cate actiuni ai cumpara platesti acelasi comision. ceea ce e bun la forex este faptul ca poti incepe cu un capital mic din cauza leverageului. nu ma refer aici la leverage 1:100 ci la un leverage rezonabil de 1:20. pe bursa trebuie sa ai un cont foarte mare numai ca sa ai un leverage de 1:4. leverageul este foarte important pentru ca iti permite sa faci bani din miscari mici:daytrading. la bursa daca nu ai zeci de mii de dolari trebuie sa ai un sistem care anticipeaza miscari foarte mari sau sa tranzactionezi grafice zilnice.return of investement (roi) care il faci din forex cu leverage e mult mai mare decat cel de la bursa si nu zic aici de intrari cu 10% din cont per tranzactie ci cu intrari de 1-2%.

[dandesign]

Sunt brokeri care iti permit sa intri cu orice suma.

Daca ai 100$ poti tranzactiona doar 100$ , chiar daca leverage permite sa intri cu 5000$ (sa zicem ..).

Ce importanta are leverage ?

Editat Decembrie 12, 2011 de dandesign

[deleted on request 01]

Sunt brokeri care iti permit sa intri cu orice suma.

Daca ai 100$ poti tranzactiona doar 100$ , chiar daca leverage permite sa intri cu 5000$ (sa zicem ..).

Ce importanta are leverage ?

 

poti sa faci bani din miscari mici. daca intri cu 100 de dolari iti trebuie o miscare de x pips pentru un anumit profit. daca in schimb intri cu 1000 de dolari e suficienta o miscare a pietei de x/10 pentru a face aceasi bani. nu mai stiu exact calculele pentru bursa ... dar cu un leverage mic de 1:4 trebuie sa ai un cont mult mai mare pentru a face ceea ce poti face in forex ca daytrader.

[Stefan]

Acum ca s-a pornit o discutie, o sa las topicul

 

@alayoua we don't really appreciate copy/paste posting around here. And if you want to continue posting in this forum (including in the analysis section), please put your link ONLY in your signature.

[Adi.M]

daca iti poti permite sa tranzactionezi la bursa cu un capital mare costurile sunt mult mai mici pentru ca indiferent de cate actiuni ai cumpara platesti acelasi comision

 

La actiuni comisionul este stabilit procentual in functie de valoarea tranzactiei. Nu e mare diferenta fata de forex, raportat pe fiecare categorie de trading(scalping, long term investing/trading).

Editat Decembrie 12, 2011 de Adi.M

[deleted on request 01]

daca iti poti permite sa tranzactionezi la bursa cu un capital mare costurile sunt mult mai mici pentru ca indiferent de cate actiuni ai cumpara platesti acelasi comision

 

La actiuni comisionul este stabilit procentual in functie de valoarea tranzactiei. Nu e mare diferenta fata de forex, raportat pe fiecare categorie de trading(scalping, long term investing/trading).

 

@adim

nu stiu la ce brokeri ai vazut tu dar eu am vazut mai multi brokeri mari de actiuni care au comsion fix indiferent de volumul tranzactionat

in cazul de fata este 9.99 dolari:

https://www.tdamerit..._Pricing_Module

 

s-ar putea ca tu sa te referi la cfd uri.

Editat Decembrie 12, 2011 de lamishto

[Adi.M]

Hm, ai dreptate. Din ce tranzactionasem eu la BVB acum ceva timp, toti brokerii aveau comision procentual. Chiar si acum practica e in mare la fel.

 

Vad ca comisionul minim este de 10$ pe tranzactie, comparativ cu cca 0.50% fata de brokerii de pe la noi.

[deleted on request 01]

Hm, ai dreptate. Din ce tranzactionasem eu la BVB acum ceva timp, toti brokerii aveau comision procentual. Chiar si acum practica e in mare la fel.

 

Vad ca comisionul minim este de 10$ pe tranzactie, comparativ cu cca 0.50% fata de brokerii de pe la noi.

 

io m-am interesat de actiuni si de ce as putea sa fac ca trader de actiuni in cazul in care forexul o sa devina cu taxe mari. se vorbeste acum de introducerea taxei pe tranzactii in europa si asta o sa duca la cresterea costurilor de tranzactionare(0.05%per tranzactie inseamna dublarea spreadului). alternativa la forex daytrader ar fi "pattern day trader" pe actiuni in america. dar pentru asta iti trebuie un cont de minim 25000 de dolari+ 5000-7000 de dolari cu care sa investesti zilnic pentru miscari mici. sa vedem ce o sa fie in viitor. am speranta ca londra nu va accepta niciodata taxa tobin aia pe care o vor franta si germania.

[Alssex J.]

apropos de taxa aia : http://www.reuters.com/article/2011/12/11/us-eurozone-britain-idUSTRE7BA0BD20111211

 

Marea Britanie nu vrea in niciun caz asa ceva, dar momentan e izolata politic (in UE). Daca se impune taxa asta la nivelul UE, ce putem noi, micii traderi de retail, sa facem? Nu imi dau seama cum se aplica, din punct de vedere legal... daca tranzactionam cu brokeri inregistrati oriunde in afara de europa (chit ca e vorba de offshore-uri sau brokeri din... japonia), s-ar mai aplica taxa? (tinand cont ca noi suntem rezidenti in uniunea europeana, de aici provine nedumerirea mea).