FOREX Advantages
There is a reason why the largest financial market in the world is the foreign exchange market, why the world chooses to trade in the FX market more than any other market. The following are a list of some of those reasons.
FOREX – The world’s most liquid financial market
The Forex market is by far the most transparent market in the world. It is impossible for one player to move the market in foreign exchange.
In other financial markets large players moving large sums of money in or out of a share or commodity can cause the price of the particular share or commodity to jump; this is known as a gap.
Moving currency prices is very difficult, it usually takes countries with a combined effort and multi-billion dollar amounts to move currencies in the FX market. You may be asking yourself, “OK, so the Forex market it’s huge, but why should I care?” There is a simple answer to that; size, liquidity, transparency, it all points to a market that is easily accessible 24-hours a day and no non-government body is really able to influence the market – that means everyone trading in the market has the same chances of making money whether your trading $10,000 or $100 million, there is no inside information, there are no limitations on when to trade or in which direction and these are only the first points on why everyone is choosing to trade in Forex rather than any other financial market
FOREX – 24-hours a day 5-days a week
The FX market is the world’s only true global market; it is always open 24-hours a day 5 days a week. Trading starts in Sydney, Australia on Monday 8am Sydney time.
As the day progresses other regions join in; starting with Asia, Hong Kong, Singapore and Tokyo being the major players then the Middle East enters the market followed by Europe where London the worlds FX centre joins in, then the Americas where the U.S is the major player joins the trading world. After the Americas it’s back to Australia where the circuit starts all over again.
The heaviest volumes of trade occur during the European afternoon sessions when the U.S starts trading in the market and Europe and the Middle East are still trading.
As stated above, trading in the FX market starts at 8am Sydney time on Monday morning (local time) and until the markets close at 5pm New York time on Friday (local time).
A market with no time restrictions assures the world’s investors the ability to trade at any time day or night and that you never have to be left out of the market in an event of an economic announcement or other world event – this makes the Forex market truly unique.
FOREX – Non-Centralized Market
Trading in foreign exchange occurs via the OTC market – “Over the Counter”; there is no recognized bourse responsible for FX trading. The FX market is essentially non-regulated by governments but rather by the market itself. Many different bodies offer foreign exchange services; these may include banks, brokers, money changes and so on. The difference between all these groups are generally the terms needed to do business with them and the conditions offered.
The one thing they all have in common is that the exchange is performed between two parties, for example a client and his broker; this is known as an OTC trade. (Refer to The Basics in FX – Exchange vs. OTC for a more in depth discussion)
FOREX – On-line, Executable, Streaming Rates
Many Brokers offer streaming inter-bank prices that they in turn receive from other large banks or financial institutions. This is a great benefit to the trader, since at any time he is able to execute a trade on real time prices and receive immediate execution on the trades. This level of efficiency and service is not even available at major banks that have been offering FX services for decades.
FOREX – No Commissions, No Costs
When comparing the Forex Market to other financial markets, one can see an immediate difference, equity and commodity markets all charge commissions in one form or another. In equity markets costs can vary from one broker to another anywhere from $5 to $30 per trade, and the non-online brokers sometimes charge $100 per trade. Futures markets fare no better often charging the client fees so that he is able to view the live market prices, this can amount to hundreds of dollars a month in fees now add to that the exchange fees, clearing fees and trading fees and you can quickly see the difference.
FOREX – Inter-bank Spreads
Spreads are inter-bank spreads on streaming prices directly from trading platforms. The standard spread on the EUR/USD is 3 pips. In percentage terms we can see that a 3 pip spread on EUR/USD is equivalent to (0.0003/1.3430*100=) 0.0223%, that in itself is usually a much smaller spread then can be found in equity and commodity markets.
Equity Markets for example usually have a standard spread, between the bid and ask prices that is equivalent to 0.125% that’s more than five times the spread in the that is offered on the EUR/USD rate, which is the most active currency pair in the FX market.
When comparing the FX prices available in the Futures Markets the situation isn’t much better. The same currency pair EUR/USD can often find spreads that are twice as wide as the standard spreads offered.
This is another reason why trading in Forex is so attractive as the spreads offered is so small with no commissions added that making money in FX is a real possibility. (Refer to The Basics in FX – Spreads for a more in depth discussion)
FOREX – Shorting is available
When trading in most financial markets, one normally has the ability to go in one direction “buy” or “up”, the only other option available is to be out of the market. For instance say you were looking at a particular share that you believed was a good investment, the correct strategy would be to buy the share.
However there was no real way of making a profit if you believed the share was going to go down. This is true for most financial markets the ability to short (sell it without owning it) a share, commodity or instrument is non-existent or has severe limitations. In the FX or Foreign Exchange market this is not the case. You can readily profit from rising or falling prices just as easily.
This is a huge advantage, for if we assume that 50% of the time a financial market is either rising or falling, that means that you can only potentially profit out of a market 50% of the time; i.e. only in times when the shares are rising. (Refer to The Basics in FX – Shorting for a more in depth discussion)
