There are many benefits and advantages of trading forex. Here are
just a few reasons why so many people are choosing this market:
No commissions
No clearing fees, no exchange fees, no government fees, no
brokerage fees. Most retail brokers are compensated for their services through
something called the "bid-ask spread".
No middlemen
Spot currency trading
eliminates the middlemen and allows you to trade directly with the market
responsible for the pricing on a particular currency pair.
No fixed lot size
In the futures markets, lot or contract sizes are determined by
the exchanges. A standard-size contract for silver futures is 5,000 ounces. In
spot forex, you determine your own lot, or position size. This allows traders to participate with
accounts as small as $25 (although we'll explain later why a $25 account is a
bad idea).
Low transaction costs
The retail transaction cost
(the bid/ask spread) is typically less than 0.1% under normal market conditions.
At larger dealers, the spread could be as low as 0.07%. Of course this depends
on your leverage and all will be explained later.
A 24-hour market
There is no waiting for the opening bell. From the Monday morning
opening in Australia to
the afternoon close in New York, the forex market never sleeps. This is awesome
for those who want to trade on a part-time basis, because you can choose when
you want to trade: morning, noon, night, during breakfast, or in your sleep.
No one can corner the market
The foreign exchange market is so huge and has so many
participants that no single entity (not even a central bank or the mighty Chuck Norris himself)
can control the market price for an extended period of time.
Leverage
In forex trading, a small deposit can control a much larger total
contract value. Leverage gives
the trader the ability to make nice profits, and at the same time keep risk
capital to a minimum.
For example, a forex broker may
offer 50-to-1 leverage, which means that a $50 dollar margin deposit would
enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500
dollars, one could trade with $25,000 dollars and so on. While this is all
gravy, let's remember that leverage is a double-edged sword. Without proper
risk management, this high degree of leverage can lead to large losses as well
as gains.
High Liquidity.
Because the forex market is so
enormous, it is also extremely liquid. This means that under normal market
conditions, with a click of a mouse you can instantaneously buy and sell at
will as there will usually be someone in the market willing to take the other
side of your trade. You are never "stuck" in a trade. You can even
set your online trading platform to automatically close your position once your
desired profit level (a limit order) has been reached, and/or close a trade if
a trade is going against you (a stop loss order).
Low Barriers to Entry
You would think that getting
started as a currency trader would cost a ton of money. The fact is, when
compared to trading stocks, options or futures, it doesn't. Online forex
brokers offer "mini" and "micro" trading accounts, some
with a minimum account deposit of $25.
We're not saying you should
open an account with the bare minimum, but it does make forex trading much more
accessible to the average individual who doesn't have a lot of start-up trading
capital.
Free Stuff Everywhere!
Most online forex brokers offer
"demo" accounts to practice trading and build your skills, along with
real-time forex news and charting services.
And guess what?! They're all
free!
Demo accounts are very valuable
resources for those who are "financially hampered" and would like to
hone their trading skills with "play money" before opening a live
trading account and risking real money.
Now that you know the
advantages of the forex market, see how it compares with the stock market!
