Trading in foreign exchange is considered to be much more lucrative than trading in equities or futures - the main reason being the continuous nature of the forex market which allows its participants to react immediately to any new developments across the world. Not only this, the liquidity level in the forex market is much higher than what is provided by the equities or the futures markets. The absence of any commission also makes the trading in foreign exchange more attractive. However, one needs to remember that the high level of leverage available in the forex market also make it risky. There is always a chance that one’s losses may exceed the investment made. Hence, one needs to be very careful while trading in forex.
Let’s take a look at some of the features that differentiate the forex market from the markets of equities and futures.
Continued 24-Hour Trading
The forex market is open 24-hours with buyers and sellers trading in foreign exchange all the time in one or the other part of the world. Traders in foreign exchange can take instant decisions in response to breaking news from any part of the globe. One does not need to wait for the markets to open.
In contrast, after hours trading is not possible in the case of equities and futures. Although Electronic Communication Networks are installed in some of the equity exchanges to facilitate after hours trade, it is never certain that a trade will actually take place and that too at a fair price.
Level Of Liquidity
The massive trading volumes in the forex market and the all time presence of brokers and dealers willing to trade in foreign currencies leads to a very high level of liquidity. The worldwide connectivity of the forex market and the consequent high liquidity ensures price stability.
In the case of the equities and futures markets, the volumes being traded are much lesser. In addition, exchanges of different countries are operational at different times. Moreover, the trading volumes in individual exchanges are lower thus increasing the liquidity risk. The dealing spread in the case of equities and futures is quite high in comparison to forex trading.
Level Of Leverage
Leverage of 100:1 and in some cases 200:1 is very common in the forex markets. This means that a trader needs to maintain only 1% or less of his traded amount as a margin. This high level of leverage offered by several online forex trading firms can be used effectively to make massive profits since the average percentage change in a major currency in a single day is generally less than 1%. However, high level of leverage can prove to be risky too. While it can provide one with extraordinary profits; it can also result in massive losses. So the best strategy is adopt a discipline trading technique with frequent use of the stop and limit orders. In contrast, equity brokers generally offer a margin of around 2%.
Transaction Charges
The commission levels in the equity and future markets are quite high and can vary with the quantum of an order. In contrast, forex dealers provide a package of services including information related to the forex market and the various tools needed to trade for a nominal fee. The spreads on a forex transaction are quite low in comparison to a trade in stocks. Very often no additional charges are imposed for stop, limit or any other order placed in regard to a forex trade.
Potential For Profits
Since a forex trade always involves two currencies, a trader has the potential to earn money in both the rising and the falling markets depending on the short or long position taken by him.
Automatic Rollover Of Open Positions
In the forex market, at 5.00PM Eastern Time, all trades automatically rollover any open positions. Although a rollover does result in some carrying costs, it can also lead to a gain. The carrying cost is determined by the difference between the in interest rates of the countries whose currencies are being traded. So if a trader has a long position in the currency whose interest rate is higher, one can gain from the spot rollover. Although a rollover option is also available in futures trading, the cost involved is quite high.
Accessibility Of Information Required For Trade
Information required to trade in a particular stock is often private and proprietary. In contrast, foreign currencies move in response to macro conditions that are publicly disclosed. So it is easier to acquire information about the possible movement of forex rather than stocks.
The number of stocks being trading in a stock or futures market is umpteen, in comparison only a few currencies are traded regularly on the forex market. So gathering information about the large number of stocks is much more difficult than being aware about the factors that drive the major currencies in a forex market.