The 6 Advantages Forex Trading Has Over Other Investments
There are many different advantages to trading forex instead of
futures or stocks, such as:
1. Lower Margin Just like futures and stock speculation, a forex
trader has the ability to control a large amount of the currency
basically by putting up a small amount of margin. However, the
margin requirements that are needed for trading futures are
usually around 5% of the full value of the holding, or 50% of
the total value of the stocks, the margin requirements for forex
is about 1%. For example, margin required to trade foreign
exchange is $1000 for every $100,000. What this means is that
trading forex, a currency trader's money can play with 5-times
as much value of product as a futures trader's, or 50 times more
than a stock trader's. When you are trading on margin, this can
be a very profitable way to create an investment strategy, but
it's important that you take the time to understand the risks
that are involved as well. You should make sure that you fully
understand how your margin account is going to work. You will
want to be sure that you read the margin agreement between you
and your clearing firm. You will also want to talk to your
account representative if you have any questions.
The positions that you have in your account could be partially
or completely liquidated on the chance that the available margin
in your account falls below a predetermined amount. You may not
actually get a margin call before your positions are liquidated.
Because of this, you should monitor your margin balance on a
regular basis and utilize stop-loss orders on every open
position to limit downside risk.
2. No Commission and No Exchange Fees When you trade in futures,
you have to pay exchange and brokerage fees. Trading forex has
the advantage of being commission free. This is far better for
you. Currency trading is a worldwide inter-bank market that lets
buyers to be matched with sellers in an instant.
Even though you do not have to pay a commission charge to a
broker to match the buyer up with the seller, the spread is
usually larger than it is when you are trading futures. For
example, if you were trading a Japanese Yen/US Dollar pair,
forex trade would have about a 3 point spread (worth $30).
Trading a JY futures trade would most likely have a spread of 1
point (worth $10) but you would also be charged the
commission on top of that. This price could be as low as $10
in-and-out for self-directed online trading, or as high as $50
for full-service trading. It is however, all inclusive pricing
though. You are going to have to compare both online forex and
your specific futures commission charge to see which commission
is the greater one. 3. Limited Risk and Guaranteed Stops When
you are trading futures, your risk can be unlimited. For
example, if you thought that the prices for Live Cattle were
going to continue their upward trend in December 2003, just
before the discovery of Mad Cow Disease found in US cattle. The
price for it after that fell dramatically, which moved the limit
down several days in a row. You would not have been able to
leave your position and this could have wiped out the entire
equity in your account as a result. As the price just kept on
falling, you would have been obligated to find even more money
to make up the deficit in your account.
4. Rollover of Positions When futures contracts expire, you have
to plan ahead if you are going to rollover your trades. Forex
positions expire every two days and you need to rollover each
trade just so that you can stay in your position.
5. 24-Hour Marketplace With futures, you are generally limited
to trading only during the few hours that each market is open in
any one day. If a major news story breaks out when the markets
are closed, you will not have a way of getting out of it until
the market reopens, which could be many hours away. Forex, on
the other hand, is a 24/5 market. The day begins in New York,
and follows the sun around the globe through Europe, Asia,
Australia and back to the US again. You can trade any time you
6. Free market place Foreign exchange is perhaps the largest
market in the world with an average daily volume of US$1.4
trillion. That is 46 times as large as all the futures markets
put together! With the huge number of people trading forex
around the globe, it is very hard for even governments to
control the price of their own currency.
About the author:
David Morrison gives you a handy, easy to understand intro to
the wonderful, profitable world of forex trading. This article
is free to publish - more information can be found at www.ForexTrader123.com
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest / trade in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading.
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