Forex Trading 6 Advantages Over Other
|There are many different advantages to trading forex
instead of futures or stocks, such as: |
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
traders money can play with 5-times as much value of product as a
futures traders, or 50 times more than a stock traders. When you are
trading on margin, this can be a very profitable way to create an
investment strategy, but its 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.
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
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
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 brokers 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.
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
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.
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 like Monday-Friday.
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.