The forex market was accessible mainly to banks, multinational companies and other participants who were trading in large volumes of exchanges. Small individual traders like you and me have had limited access to this market for a long period of time. Now with the development of technology and the Internet, forex trading has become one of the investment alternatives that enjoy increasing popularity among the general public.
- Advantages of trading in the forex market:
- Open 24 hours and closes only on weekends ;
- It is characterized by high efficiency and liquidity;
- very fickle;
- very low transaction costs;
- You can use a high level of leverage (borrowed money) with ease;
- And you can win whether the market is rising or falling.
- 24 hour continuous trading
The foreign exchange market remains open 24 hours a day. You can trade after you get home from work. No matter what time frame you want to trade on and no matter what time of day you will be trading, you will always find enough sellers and buyers to play the role of the opposite party in your deals. This feature available in this market will give you enough flexibility to manage your trading activity within your daily routine.
fluidity and efficiency
When there are a large number of sellers and buyers, you can expect to buy and sell at a price very close to the current market price. The currency market is the most liquid market in the world, with trading volumes ranging from 50 to 100 times the volume of trading on the New York Stock Exchange (Source: Oanda)
If you are trading in stocks, you may have come across situations where a news release causes the price of the underlying stock that you may have bought previously to go up or down. It is possible that the director of the company has been dismissed by the shareholders, or that the company has launched a new product, and therefore the large investors have started to buy the shares of this company. Stock prices can be greatly affected by the actions or reactions of one or a few individuals. Therefore, if you rely on television reports and newspapers for news, most of the opportunities and warnings will reach you late, which will not allow you to take advantage of them.
On the other hand, the value of currencies is affected by many factors, and with the presence of this huge number of participants, the possibility that an individual or group of individuals will greatly affect the value of the currency will not exceed one minute. Due to its huge size, the currency market is difficult to manipulate. The ability of people to plan 'inside trade' is almost non-existent. Thus, as a normal trader, you are not affected negatively significantly. Rather, it can be said that you are playing on relatively equal ground in parallel with the other traders and investors you are competing with.
For those who have traded the financial markets before, they may have heard of price 'gaps'. 'Gaps' appear when prices 'jump' from one level to another without taking gradual steps to reach it. For example, you may trade a stock that closed at $10 at the end of today's trading, but due to some events that occurred at night, it may open tomorrow's trading at $5 and continue falling for the rest of the day.
Gaps bring another degree of uncertainty that may interfere with a trader's strategy. Perhaps the most worrying aspect is when a trader uses stop-loss orders. In this case, if the trader places a stop-loss order at $7 because he does not want to continue the deal if the stock price reaches this level, despite that, his deal will remain open during the night, and therefore when he wakes up the next day he will find that he has incurred a loss greater than the one that he had. He was ready for it.
When you look at some forex charts, you will realize that there are few price gaps or you may not find any of them at all especially on long term time frames such as 3 hour, 4 hour or daily.
volatility
Trading opportunities exist when prices fluctuate. If you buy the stock price at $2 and the stock stays at that level, there is no chance of making a profit. The magnitude, level and frequency of volatility is what is called volatility. As a trader, volatility is what you will profit from. Swaps with large volumes and high volatility in parallel with the limited financial assets traded create greater daily trading opportunities in the currency market, which can be exploited by day traders. The large fluctuations in the currency market indicate that a trader can profit in currency trading by more than five times what he can achieve with the most liquid stocks.
Volatility is a measure of the maximum return that a trader can achieve with a correct forecast. The degree of volatility with the most liquid stocks ranged from 60 to 100. Fluctuations in currency trading are up to 500. (Source: Oanda)
In this regard, for the day trader, currencies are a much better trading vehicle than the stock markets.
Low transaction costs
A forex transaction usually does not involve any commissions or swap fees. For a forex trader, the spread is the only cost he incurs when opening a position. In addition, due to the efficiency of the commission market, there are only minimal costs for so-called 'slippage' or none at all.
'Slippage' is the cost to the trader when he enters the market at a price worse than the level at which he wanted to enter. For example, a trader may want to buy the stock at $2, but over time the order will be executed but at $2.5 per share. This fifty cents difference is what represents the cost of the slippage that he incurs. The cost of slippage has a greater impact on large traders. When they buy large quantities of the commodity, this leads to an oversupply of the market orders. This causes pressure on the price and thus pushes it higher. Over time, they can buy all the quantities they want, but the average price at which they got the item will be higher than the price they intended to buy. Conversely, when they want to sell large quantities of a commodity, this creates an oversupply of sell orders. This leads to pressure on the price to retreat. Over time, they finish selling all the goods in their possession, but the average selling price is lower than the initial price at which they would like to sell.
Due to low transaction costs, minimal slippage and high level of daily volatility allow traders to trade at limited cost levels. Roughly speaking, you can expect a spread of 0.03% of the position size. To give you an example of this, you might buy and sell $10,000 USD while incurring only 3 spreads, which is $3.
Leverage
There are not many banks or individuals who would be willing to lend you money to use in stock trading. Even if you find them, it will be very difficult to convince them to invest in your ideas that the price of a particular stock will rise or fall. Thus, most of the time if you have a $10,000 account you will only be able to trade in a number of shares whose value does not exceed that amount.
Conversely in forex trading since you are using 'borrowed money' you can trade $10,000 as you will need between $50 (when the borrowed margin ratio is 1:200) to $200 (when the borrowed margin ratio is 1:50) in Your trading account. This will allow the average trader with a small trading account of less than $10,000 to make sufficient profits from the movements of the currency market. This concept is explained in more detail in the Part Time Currency Trader book.
Profit from bullish and bearish market
When you trade in stocks, you can only profit when the stock price goes up. When you suspect that the stock price will fall or move sideways, the thing you can do is either sell the shares or sit on the side. One of the frustrating things about stock trading is that one cannot profit if prices fall. In the currency market, it is easy to trade even if the currency is on a downtrend and thus you can make profits while its value is declining. This is easy to do because currency trading simply involves buying one currency and selling another simultaneously so there are no structural biases that make it difficult to trade downtrends. This is why the currency market is sometimes referred to as the eternal bull market.