ADVANTAGES OF FX TRADING
Although the Forex market is by far the largest and most liquid in the world, day traders have, up to now, focused on seeking profits mainly in stocks and futures markets. This is mainly due to the restrictive nature of bank-offered Forex trading services.
There are many advantages to trading spot Foreign Exchange as opposed to trading stocks and futures. The main advantages are listed below.
FX is a global market that never sleeps. It is active 24 hours a day for almost 7 days a week. Most activity takes place between the times that the New Zealand market opens on Monday, which is Sunday evening in Europe, and the US market closes on Friday evening.
The FX market is huge and is still expanding. Daily average volume now exceeds USD 3.2 trillion. Technology has made this market accessible to almost anyone, and retail traders have flocked to FX.
FX margin ratios tend to be higher than those available in equity because it is more liquid - there is nearly always a price in FX - and it tends to be less volatile.
Spreads, the difference between the bid and offer price, in FX are minuscule. Just compare a 2-pip price in EUR/USD with a price in even the most active and liquid equity issue. Furthermore, FX prices are typically ‘good’ for far larger amounts than in equity. The spread is the hidden, ‘intrinsic’ cost of dealing, which is minimal in FX. Technology has made these tight prices available to almost everyone.
No Commission or Transaction Costs
The majority of OTC FX business is commission free and, with such narrow spreads, the intrinsic cost of trading is far lower than in other assets, such as equity.
No Limit Up/Limit Down
Futures markets contain certain constraints that limit the number and type of transaction that a trader can make under certain price conditions. When the price of a certain currency rises or falls beyond a certain predetermined daily level, traders are restricted from initiating new positions and are limited to liquidating existing positions only, if they so desire. This mechanism is meant to control daily price volatility but, in effect, since the futures currency market follows the spot market anyway, the futures market may undergo what is called a 'gap' the following day. In other words, the futures price will readjust to the spot price the next day. In the OTC market, no such trading constraints exist, permitting the trader to truly implement their trading strategy to the fullest extent. Since a trader can protect their position from large, unexpected price movements with stop-loss orders, the high volatility in the spot market can be fully controlled.
Equal Access to Market Information
Despite the introduction of best execution regulations in Europe and the US, few would disagree that professional traders and analysts in the equity market have a huge competitive advantage in comparison to individual traders. In FX, perhaps the only advantage that the big banks have is flow information. But FX is a democratic market, where virtually all participants have access to the same market-moving information as everyone else.
Sell Before You Buy
Equity brokers offer very restrictive short-selling margin requirements to customers. This means that a customer does not possess the liquidity to be able to sell stock before he buys it. Margin-wise, a trader has exactly the same capacity when initiating a selling or buying position in the spot market. In spot trading, when you're selling one currency, you're necessarily buying another.