Advantages of the Forex Market
Foreign exchange (Forex) is most volatile of all financial markets. It deals with real time biggest volume of buyers and sellers trading in currencies of many countries with the major centers being London, Frankfurt, New York and Sydney. The Forex market is the only market to be open 24/7 and 5.5 days across the world.
The Forex market is well known for its speculative aspects of volume, liquidity and trading prospects. Another attractive feature for trades is the high leveraging levels offered by this sector of the financial market.
There are many advantages to the Forex market as opposed to trading in stocks and futures. Here’s why:
- Bidding/Asking Rates: These rates have become tight in the last few years. On the most traded pair of currencies of the Euro/USD, traders are able to offer only 5 pips. At least in the futures markets, the spread offered vary between 5 to 9 pips and go even higher in tighter conditions (which happens more often in currency futures).
- Requirements on Margins: In Forex trading, the usual margin is 1%. To laypeople, this translates to a value of $1 million dollar position with just $10,000 in the account. By this standard, futures margins are much bigger and change more often. If stocks are traded on a non-margin basis they can be restricted by 50% or so.
- 24 Hour Markets: Forex markets are open around the clock, as markets across the world open at different hours. Though Electronic Communication Networks exist for stock and futures markets (for eg. Globex) after hours trading, the prices are not competitive and liquidity is not great either.
- No Up/Down Limits: Futures markets have natural constraints that limit the number of transactions and also the type, that a trader can do – these are constrained by price. If and when a particular currency’s price falls below a predetermined set point on a particular day, traders cannot start new transactions and are limited to selling only – if they want to do so. This is supposed to contain price volatility but since currency futures mirror the spot market, the currency futures will undergo a correction the next day to reflect the “spot price”. Over the Counter markets (OTC) have no such restrictions, letting the trader cash in on his strategy to the fullest extent. The trader is able to act quickly to keep his position safe and implement stop loss orders. This way, sport market volatility is controlled better.
- Buying and Selling: Selling margins offered by equity brokers can be small on occasion. This translates to illiquid conditions for the customer where he cannot sell any stock before buying. In the spot markets, you can buy and sell currencies simultaneously.